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Issues to consider when planning outcomes contracting
When is it advisable for the public sector to make use of outcomes contracting? Which themes and needs is it best suited for? How to get started with preparations for outcomes contracting?
The stages of outcomes contracting from idea to decision-making are listed below, together with questions to support planning and decision-making. The Centre of Expertise for Impact Investing provides assistance in the outcomes contracting process management and, together with other experts, helps to model the societal benefits to be achieved.
The first thing is to determine the phenomenon in question, the extent of the affected population group, and the needs to be addressed, in other words, the desired outcomes. The phenomenon could be, for instance, youth unemployment, particularly among young people with only comprehensive school education. Unemployment generates costs and loss of income to society, and prevents young people from living a full life. The objective here could be to have a larger proportion of young people complete an upper secondary qualification, which would help them to become employed.
After the objective has been defined, the following questions should be addressed:
- Does the objective support the strategic objectives of the organisation (or in a broader sense)?
The objectives of outcomes contracting must support the organisation’s strategic objectives and policies, as implementation requires long-term commitment from both the organisation and its experts.
- Has the responsibility for achieving the objective been clearly assigned to someone? Who is prepared to pay for the achievement of this objective?
A responsible entity must be identified that is prepared to pay for the achieved impacts. Although several entities may benefit from the impacts created, one must be clearly responsible.
- Can frontloading prevent the occurrence or escalation of problems and costs?
To ensure wellbeing is created in an economically sustainable manner, the outcomes to be sourced must have the ability to prevent the occurrence or escalation of problems and, consequently, of costs in the longer term.
- Is there a general overview available of the current activities related to this objective?
Outcomes contracting will only generate added value if actions to achieve the specified objective are currently insufficient. Therefore, it is important to know what is already being done. Outcomes contracting must be linked to existing activities in order to create sustainable results.
If the answer to all the questions above is “yes” and outcomes contracting has been identified as an effective method for addressing the needs, the next step is to model the societal benefits. Such modelling requires an in-depth understanding of the phenomenon involved; the underlying root causes and the changes needed to address them. This analysis enables the public sector to determine the appropriate indicators to verify proven outcomes, and the reward paid for such outcomes.
The modelling includes both economic calculations and co-creation, which alternate so that economic calculations produce material for co-creation, and vice versa. The preparation of economic calculations requires expertise and data, while co-creation requires input from representatives from the public sector, service providers, research institutes and potential investors, as well as experts by experience.
Below is a description of a process for modelling societal benefits, which can be modified as necessary.
- Identify the current situation and verify phenomena and cost trends in recent years (economic modelling)
For instance, what is the recent youth unemployment trend and what are the resulting costs?
- Define reasons for cost trends (economic modelling)
For instance, what is included in the costs of youth unemployment, and what explains changes in these costs?
- Outline trends affecting the phenomenon and costs in the coming years (economic modelling and co-creation)
What are the consequences of no intervention? For instance, what is the anticipated change in youth unemployment rate, and what are the economic and human consequences?
- Define the underlying root causes of the development (co-creation)
Modelling is typically based on existing research data, statistical data and expert assessments. It is necessary to cross traditional research and sectoral boundaries to establish a common understanding.
- Define impact objective
Impact refers to societal benefits materialising over a longer period of time. The impact objective is derived from strategic objectives, and should be defined as the desired outcome: What will the world look like when the objective has been achieved? An impact objective could be defined as follows: In 2030, all residents of our municipality aged 25–35 will be well and live a full life.
- Define desired changes (co-creation)
To achieve an impact objective, concrete changes must take place in people’s behaviour, living conditions and service structure. These changes must be such that they can be reasonably expected to lead to the achievement of the impact objective (theory of change). An essential part of modelling is to impose limitations on the system being changed to allow all necessary changes to be taken into account. For instance, for a young person, access to employment may require better life management skills, upskilling to meet the labour market needs, support from the local community, finding a suitable job, etc.
- Valuate change (economic modelling)
The outcomes measured in projects include both human or environmental wellbeing and economic benefit. The public sector will only pay for outcomes, and payments could be tied to actual savings, calculated savings, a combination of the two, or a combination of savings and increased economic benefits (e.g. tax revenue). To assess the impact of the planned activities, an alternative calculation can be prepared to compare the costs if the project was not carried out. Several calculation methods are available, but control group and calculated forecast are the two main approaches. In practice, the control group approach may be impossible because it could make it difficult to expand activities with a proven impact during the project.
- Identify existing solutions, services and shortcomings (co-creation)
To produce added value and sustainable impact with outcomes contracting, resources must be allocated to areas where existing solutions are ineffective or solutions do not exist. It is also necessary to understand the linkage of the project with the existing system.
Modelling of societal benefits provides information and perspectives to support decision-making. If the results of the modelling suggest an outcomes contracting would be useful, the following questions need to be answered before making a decision:
- Will the project create wellbeing and economic benefit in the long term?
Although it is not necessary for economic benefits to arise during the project, the public sector, or the client, must be prepared to pay for the benefit during the project or shortly after its completion. To drive commitment to the project, decision-makers must have an idea of the amount of wellbeing and economic benefit the project will create, and in what timespan.
- What are the project’s measurable impact or outcome objectives that the public sector is prepared to pay for?
Since the public sector pays for outcomes instead of deliverables, it is necessary to determine which concrete changes the public sector is prepared to pay for. The objectives and their achievement must be unequivocally verifiable to eliminate any differing interpretations by the cooperation partners.
- Does the client have a sufficient understanding of the changes needed and the participants required for the objective of the project to be achievable?
A single project is rarely able to address all root causes; it is therefore important to identify any other changes needed and the participants required for the objective of the project to be achievable. For instance, are changes in legislation or in standard practices necessary to have the desired sustainable impact?
- How much is the public sector prepared to pay for the achievement of the outcome objectives?
Societal benefit modelling shows the amount of wellbeing and economic benefit that can be created if the objective is achieved. At this stage, a decision must be made on how much the financiers are prepared to pay for such benefit to the parties responsible for project implementation. Is full repayment in the form of monetary savings demanded, or is partial repayment in the form of qualitative benefit acceptable? In other words, is it a sufficient outcome that more and more children have opportunities for healthy growth and development, or that the number of young people at risk of social exclusion is lower?
- Is the size of the project appropriate in relation to the risk?
A small target group tends to increase the risk. It is extremely rare to have the entire target group included in the project, which increases the role of chance. Service providers and potential investors may not be prepared to bear a high risk on their own.