Contracting for outcomes

In a world increasingly preoccupied with being 'results focused', 'achieving outcomes' and 'outcomes-based thinking', the concept of 'contracting for outcomes' is particularly attractive. The vision is that we should move beyond the type of contracting we have been doing in the past - usually seen as having consisted of 'contracting for outputs' of some sort. In the new regime, funders would simply specify what they want to achieve in terms of higher-level outcomes and providers would contract to achieve these. If they were achieved, providers would be rewarded and if they were not achieved, providers would received sanctions of some type. In such a world we would see less effort focused by funders and providers on the detailed specification of low-level outputs, providers would be free to determine the way they went about achieving high-level outcomes, and it would be more likely that there would be steady progress towards the achievement of higher-level outcomes.

The reality is a little more complex than the picture presented above. However it is only at the point when people try to implement contracting for outcomes that they find that it is more complicated that initially thought. The fact that organizations have not been contracting for outcomes in the past provides a clue that there may be more complexity involved than at first sight. 

The immediate very practical problem which is faced at the start of the journey toward contracting for outcomes lies in how you specify exactly what it is that providers will be contracted to provide. In the case of contracting for outputs it is obvious - providers will be contracted to provide specific goods and services (outputs) which are measurable and controllable (in the sense that the provider is the one which produced them) and hence attributable to the provider (i.e. we can be easily demonstrated that the provider produced the output). Immediately one moves up the level at which one wants to contract within an outcomes hierarchy, away from outputs towards higher-level outcomes, the situation becomes more complex.

The problem is that if an outcome is not controllable by a provider (in contrast to outputs which are) then in a case where the outcome does not occur, in what circumstances should the provider be held to account for it's non-occurrence? The provider can always blame the absence of one or more of the other factors which were required to bring about the outcome. On the other hand, if you cannot attribute a higher-level outcome to a provider (because there are many different factors which could have possibly caused it) in what circumstances does it make sense to reward a provider for achieving the outcome? A contract lawyer looking at funders moving into this type of contracting for outcomes can only see disputes and litigation on the horizon. While such litigation may be good for keeping the legal profession in work, it is not necessarily so good for ensuring a smooth relationship between funders and providers.  

In order to deal with this issue, those attempting to develop contracting for outcomes approaches need more specific advice which goes beyond simple statements that it is just a matter of contracting for outcomes, not outputs, and that everything will then fall into place. 

There are some who conclude that contracting for outcomes is just too hard to do and that therefore we should be content with contracting for outputs. Contracting for outputs has the advantage of being very transparent and straightforward. Such critics usually propose having other mechanisms in place which focus attention on the outcomes side of the equation but which are separate from the legal requirements contracted for within the contracting mechanism. On occasion, this type of 'too hard to do' approach has been implemented in an entire jurisdiction. For instance, reforms in public administration in New Zealand in the late 1980s put the whole provider side of the public sector on a tight contracting for outputs regime. Questions regarding the link between outputs and outcomes where pushed higher up the system and left up to MInisters and their immediate funding advisers to determine. However, since 2000 this approach has been modified with the attempt to maintain an outputs focus but to build more 'Managing for Outcomes' thinking (but not 'accountability for outcomes') into all levels of the process. (See The New Zealand public sector managment system - an analysis). It is argued below that contracting for outcomes (or better put, 'outcomes-focused contracting') is not too hard as long as an approach is used which is realistic about what can be measured, what is demonstrably attributable to providers, and clear about what providers are being held to account for.

The journey towards outcomes-focused contracting need not be as painful and hard as it currently is for many of those who are working diligently to try to implement such systems. What is needed is an approach which conforms to the underlying principles of outcomes systems as outlined in outcomes theory and provides a systematic, transparent and robust way of dealing with contract negotiations regarding what providers should and should not be contracted to achieve.  

In order to move forward to outcomes-focused contracting, we need to be clear about what is meant by an 'outcome'. Currently the approach which is taken to doing this entails employing a set of contrasting terms which are used in an attempt to help funders and providers identify what exactly it is that they should be trying to contract for in the new outcomes rather than outputs-focused world. The contrasting terms which are used include:  deliverables, outputs, objectives, indicators, key performance indicators, targets, intermediate outcomes, outcomes, final outcomes, goals, impacts etc. The current approach is that funders will attempt to structure their discussions with providers in terms of the types of things they want to contract for and attempt to identify them through the use of one or more of the above contrasting terms. For instance, a provider may be told that contracting should no longer be for outputs (or at the output level) and that it should now be for intermediate outcomes (or at the intermediate outcomes level). 

The intermediate outcomes level is often chosen by funders as the level at which contracting for outcomes should be struck. This is because they realize that if they attempt to strike the level at higher-level outcomes (which by definition are above the immediate outcome level) there will be too many other factors influencing whether outcomes will occur at that level. Funders are appropriately worried that this lack of 'controllability' by the provider will be a problem when attempting to hold providers to contractual account. They are right to be worried about this problem. However the difficulty they face with this approach is that in just talking about intermediate outcomes they have not clearly defined them in terms of their most important characteristic - controllability by the provider. It is entirely possible that the intermediate outcomes which are identified for contracting may also suffer from a lack of provider controllability as with the high-level outcome they are not wanting to contract for.

As discussed below, this lack of controllability becomes almost an inevitability if the request to the provider to identify intermediate outcomes comes associated with a demand that whatever intermediate outcomes are identified are not, at the same time, allowed to be seen as outputs. This problem arises because the concept of an intermediate outcome is simply a relative term  - it is a step in an outcomes model (a hierarchical model of the set of steps which leads up to high-level outcomes) which lies below high-level outcomes. The term - intermediate outcomes - in itself, contains no explicit information about whether or not intermediate outcomes should or should not be controllable by, or demonstrable as attributable to, a provider. 

To solve this problem we need to clear about the key features of the steps and outcomes which can exist within an outcomes model (for our purposes here an outcomes model can be defined as a visual or other hierarchy of all of the steps which are needed in order for higher-level outcomes to occur). These features are set out in the article on Features of Steps and Outcomes Appearing Within Outcomes Models. 

In summary, steps or outcomes within an outcomes model may have one or more of the following features in relation to an intervention (a provider in this case):

Thinking in these terms allows a funder to unambiguously specify what exactly they want in terms of the steps and outcomes they want to contract a provider to deliver. If they are worried about intermediate outcomes not being controllable by a provider then they can simply specify that all steps and outcomes they want to contract for need to be controllable. If they are worried about being able to demonstrate attribution of changes in outcomes to particular providers, they can simply specify that all steps and outcomes they want to contract for need to be demonstrably attributable to a particular provider.

Funders need to realize that the approach suggested here, which is the only transparent and logical approach to outcomes-focused contracting, may surface some incoherency in high-level stakeholders current thinking about contracting for outcomes. Although potentially unsettling, this is actually an advance on the current situation where current incoherency creates many practical difficulties for those attempting to implement contracting for outcomes systems on the ground. In some cases, there will have to be awareness raising amongst high-level stakeholders about what is, and what is not, practically possible in outcomes-focused contracting in order for there to be movement beyond some current unrealistic expectations.

The major example of incoherency has already been touched on above and this is the often futile attempt to find a controllable demonstrable non-output intermediate outcome. Finding such entities is often the task which funder contract managers are given within contracting for outcomes systems. The problem here is that if funders are seeking intermediate outcomes which they can contract for in a way that their contract lawyers will be happy are enforceable (i.e. that are controllable by, and demonstrable as attributable to, the provider) the definition of an intermediate outcome and an output will start to look very similar. Injecting into this the demand that intermediate outcomes not be outputs, creates an unsolvable paradox in some cases. Many an hour of funder and provider staff time has been spent in a futile struggle with this paradox and the attempt to identify non-output intermediate outcomes. 

Below the features of outcomes are set out showing whether or not intermediate outcomes (in traditionally contractable form) and outputs have each of them.

As can be seen, in terms of a formal definition of the features of outcomes, intermediate outcomes (as defined here) and outputs are logically equivalent. This is a problem where providers are being asked to provide non-output intermediate outcomes which are demonstrably attributable. (For more information see The non-output attributable intermediate outcome paradox).

The way forward

There are only two ways of dealing with the non-outcome intermediate outcome paradox, these are:

1. For funders to insist that they will only contract for things that are controllable and demonstrably attributable (which may mean that no non-output intermediate outcomes can be found no matter how hard providers look). 
2. For funders to move away from insisting that the things that are contracted for are controllable and provable. This is a step which has major implications and is often not appropriate in public sector settings. In some systems, funders drift into such a situation without realizing that they have done so.
   

There are three possible types of contracting arrangements which are identified within outcomes theory . These are: 

Contracting Arrangement 1. Contracting only for things that are controllable and provable (outputs).

This is the traditional outputs-focused contracting, where providers are only contracted for things that are controllable and provable to them. That is, ones which it can easily be proved that the provider actually  changed. These tend to be at the output level. Outputs are defined as goods and services which are produced by a particular provider.

Contracting Arrangement 2. Contracting for things that are controllable and demonstrably attributable (outputs) and for also for 'managing for outcomes'.

In this type of outcomes-focused contracting, providers are contracted for controllable and demonstrably attributable outputs as in Contracting Arrangement 1 above, but they are also contracted to ‘manage for outcomes'. This is different from them being held accountable for achieving high-level outcomes. Within this approach there needs to be some way of knowing whether or not a provider is 'managing for outcomes', this is discussed below.

Contracting Arrangement 3. Contracting for not fully controllable or demonstrably attributable outcomes.

In the third type of contracting, providers are just held accountable for certain high-level outcomes regardless of whether these are controllable or demonstrably attributable to them. Obviously for this to make any sense such high-level outcomes need to be potentially influenceable (as defined above) by the provider. This type of contracting occurs in the private sector, for instance in regard to CEO's reimbursement being linked to the share price of their company (something which is potentially influenceable by them but not necessarily controllable by them or demonstrably attributable to them in a particular instance). 

The approach to outcomes-focused contracting suggested in this article, first requires the funder and provider to decide on which of these three types of contracting arrangements are going to be used in the case of a particular contract.  

Managing contract discussions in the case of arrangements 1 and 3

The contracting discussions for contracting arrangements 1 and 3 above are relatively straightforward. In Arrangement 1, outputs are identified as has been done traditionally in contracting and contracted for. In Arrangement 3, outcomes are identified and contracted for. In the case of 3 the parties need to be aware that the contracting is simply on the basis of whether the outcome occurred or not. The extent to which it can or cannot be demonstrated that the provider actually contributed to the improvement in the outcome is irrelevant. If the share price of a private sector company goes up, but it was just a result of the market improving, the CEO still gets their bonus. If the share price goes down, despite the CEO working as hard as they could, they still lose their bonus because it is only dependent on movements in share price.

Arrangement 3 type contracting obviously appeals to funders in situations where they directly receive a monetary benefit when a high-level outcome is achieved (as is the case with private sector shareholders). They are then in a position to share some of this financial reward as a bonus (for instance with the CEO). In the case where the outcome has not been achieved (the share price did not go up) the funders no longer have to provide the bonus for the CEO. This obviously suits them in that in this circumstance they do not have available any extra cash. This type of arrangement is less likely to work in the public and community sectors where funders in a number of cases do not received any direct cash benefit as a result of high-level outcomes being achieved. They therefore do not have additional funds available which they could distribute as bonuses to providers. In addition, where activities require the collaboration of a large number of parties, including voluntary contributions from some, the idea that only selected participants in the process (i.e. contracted providers) should receive a bonus for achieving high-level outcomes is likely to grate with other stakeholders. It may even result in their withdrawing their collaboration in the future.

Managing contracting discussions for Contracting Arrangement 2 - outcomes-focused contracting

Contracting discussions for Contracting Arrangement 2 require more structure than in the cases of Arrangements 1 and 3. Contracting Arrangement 2 is the best direction forward for outcomes-focused contracting in the public and community sectors. There needs to be some way of working out what 'managing for outcomes' (but not being accountable for them) means. The outcomes theory approach to this problem is to structure such discussions around a visual outcomes model which is constructed in a particular way. While structuring discussions in this way is really essential in the case of Arrangement 2, it can also be beneficial when used with Arrangements 1 and 3.

All discussions between funders and providers in the case of negotiations for Arrangement 2 should work off such a specifically constructed outcomes model. Standards for constructing visual outcomes models which can function as the basis for funder-provider discussions are available. Standards for drawing outcomes models.

This way of working enables outcomes-focused Contracting Arrangement 2 discussions to occur while avoiding the problems described above which can occur in current ways of conducting contracting discussions between funders and providers. Figure 1 below shows an example of part of an outcomes model being used to structure discussion between a funder and provider for a program to promote environmentally responsible consumers through the provision of appropriate information. In practice such outcomes models can be much larger than this one and consist of a number of different sub-diagrams (for examples see www.outcomesmodels.org).