6 CHANGES TO THE FUNDING ENVIRONMENT
6.1 A significant theme to emerge from interviews with TSOs was the ongoing and anticipated changes to the funding environment. Almost all TSOs anticipated changes to funding as a result of cuts in public expenditure being discussed at the time by all the main political parties. Interviews took place prior to the May 2010 UK general election, so there was some uncertainty as to the shape of the political landscape after the election. However it was widely expected that whichever political party won the election, there would follow significant cuts in public spending so as to reduce the size of the public deficit. There was a widely held view that there would be cuts of up to 20% in the level of funding received by TSOs over the coming years.
6.2 This chapter begins by examining the funding cuts (both actual and anticipated) that have been experienced by organisations taking part in the research, including the impact of these on organisations, staff, clients and the sector as a whole.
6.3 In spite of the anticipated cuts in public spending, there was a widespread realisation that the previous decade had seen an unprecedented level of growth for TSOs as the process of tendering and contracting had created new business opportunities in the context of public spending. However, competitive tendering also created a number of issues for TSOs. These centred around short-term contracts, feedback and dialogue with funders, the tension between quality and cost, and the impact of tendering on the organisation, clients, staff and skills requirements. These issues are examined in the second part of the chapter.
6.4 The impact of the global banking collapse has precipitated a major public sector spending crisis in the UK in general and also in Scotland. Whilst the full impact of this on Scotland will not be known until later in 2011, it will undoubtedly have an impact upon the role of the third sector in providing public services.
6.5 This section examines actual and anticipated spending cuts that have been experienced to date by TSOs participating in this research. The implications of these cuts - again the impacts of actual cuts and the anticipated impacts of future cuts - are then discussed. The picture at present appears mixed - some third sector organisations reported that these cuts were affecting their existing contracts to deliver public services, whilst others suggested that they might represent an opportunity for innovation by the sector, if government sought to divest itself of some non-statutory responsibilities to the sector.
6.6 Given the early stage of this process it is not surprising that this picture is confused - but this is clearly a policy strand that will need to be followed through in detail in future iterations of this study.
6.7 Many respondents in TSOs reported that even prior to the recent recession they had faced a challenging financial environment. Respondents reported that their organisations had found that the funding received from local authorities to deliver services had not kept pace with the cost of providing the service. There had been a real terms decrease in the level of funding over the previous decade.
The voluntary sector has already been hit by significant funding cuts. I think people if they watched the news they wouldn't know that cuts have already taken place. We've had a 10-15% cut in real terms in our services over the last 3-4 years. So we have been reactive to that. We need to make sure that the services we deliver can be done within the budget cuts that have been imposed. So it's a real change of priorities for us as an organisation.
Senior Manager, National Health and Social Care Provider
The Implications of Actual Funding Cuts
6.8 There were a number of effects of cuts in the availability of funding for services. There was widespread concern that a reduction in funding made it more difficult to get staff of a high quality leading to the use of less skilled staff who could be paid less. A senior manager within a care organisation, cited the use of assistant support workers in place of support workers as a means of cutting the cost of tenders.
What has happened though is that the expectations on the delivery of care have been maintained while at the same time actually devaluing the carer by reducing the salary.
Senior Manager, National Health and Social Care Provider
6.9 Discussion with TSOs' suggests widespread awareness of the ongoing and future impact of cuts in public expenditure. It was clear from discussions with respondents that many already had first hand experience of the effects of reductions in organisational budgets. Falling incomes had provided the impetus for a reconsideration of the role of TSOs in the delivery of public services. Withdrawal from the delivery of some services came about as a result of budget cuts undermining the TSOs ability to continue to provide a high quality service. Price competition generated by competitive tendering was also perceived to have an impact on service quality. Many organisations had taken the view that the principles and ethos of their organisation were incompatible with providing services of a lower quality and would therefore withdraw from the provision of those services.
We're being asked to do more and more for less and less - we've done a lot of things to bring our hourly rate down so that we can compete but there does come a point where you have to say: 'actually no, we can't deliver quality service for what you want to pay us' … In fact we did hand back a contract just recently…because…we could not say we are confident that we can provide a quality service here…the worry of course is that if we, who genuinely is a values driven organisation - if we're not doing it, who is?
Senior Manager, National Health and Social Care Organisation
The Implications of Potential Future Funding Cuts
6.10 Many of the respondents were also anticipating significant cuts in funding in the future. For example one TSO felt they had responded well to limited funding in the last decade or so, but that there was a limit to the extent to which they felt they could continue providing services if budgets continued to be squeezed.
6.11 A number of respondents also expressed concerns for the impact on client groups with fears that some may become marginalised:
I think that our client group gets more and more marginalised, because funding just gets diverted elsewhere.
Senior Manager, Regional Learning Provider
6.12 There was also a fear among some that there would be a negative impact in the longer term if funding cuts lead to the loss of some TSOs. Specialists' skills, knowledge and capacity could be lost and it would be impossible to get these back when the economic situation improved.
If we do get more cuts there will be a number of organisations that go out (of business) and I don't know if there has been a proper assessment of the capacity that those smaller organisations bring and if there has been any risk assessment of that. ….the voluntary sector could actually be really hard hit to the point where the skills and capacity is lost.
Senior Manager, National Health and Social Care Provider
6.13 However, this was not a universal view. One respondent felt that the third sector was too large and needed to be reduced in size. Another felt that funding cuts would be an opportunity to reduce organisations' dependency on public funding - or to develop new, innovative, strands of work in areas that the public sector withdrew from.
6.14 Scottish Government policy is focused on enabling "resilience" and sustainability through encouraging partnership working, sharing knowledge and building capacity 33. However, in spite of this, there is concern over the long term sustainability of the sector since although the sector's income has been rising, so also has its expenditure with a funding gap of £24M or 0.7% of the sector's income 34. In the face of budget cuts third sector organisations feel that they are vulnerable and are likely to face many challenges ahead.
6.15 This section examines issues raised by TSOs around competitive tendering. This includes: short-term contracts; feedback and dialogue with funders, the tension between quality and cost, and the impact of tendering on the organisation, clients, staff and skills requirements.
6.16 Although competitive tendering was widely accepted to encourage greater transparency in the bidding process and create new opportunities for business, there were also widespread concerns over its effects on organisational instability and staff uncertainty caused by having to re-tender for contracts. A senior manager within a large national disability charity described these issues:
We have just come through a period of significant levels of tendering and re-tendering for services [creating] both opportunities and challenges, primarily challenges because [there was] a lot of uncertainty. A lot of anxiety [was] produced by that uncertainty for staff teams. It makes future planning for the organisation difficult because we are unsure if we still have contracts in 3, 6 or 12 months. Having said that tendering opportunities are opportunities to win new business.
Senior Manager, National Health and Social Care Provider
6.17 Respondents from many organisations felt that there had been an increase in the prevalence of short-term, one year contracts. The rise of these short-term contracts was seen to be occurring in tandem with a reduction in long term contracts that would provide funding for between 3 and 5 years. The reported effects of an increase in the number of short-term contracts included: increased bureaucracy; more time spent on contractual and funding arrangements and; the need to do more funding applications in a shorter space of time. Vulnerable clients were also seen to be disadvantaged by short-term service contracts in as much as there was a lack of continuity and difficulties making long term plans to aid the client. A number of respondents reported that short term contracts also had a detrimental effect on TSOs' staff morale as well as being a disincentive for a provider to invest in staff training and the development of the service. Some staff contracts had had to be shortened to reflect shorter contracts. To illustrate some of these points:
We're being asked more and more to operate a one year contract...you cannot plan ahead and particularly when you're trying to provide a service to someone vulnerable, who has probably been let down by individuals throughout their whole life. You cannot plan a service on the basis that: 'we might be with you for twelve months, then don't know what will happen'. It's also very hard to plan efficiently, to spend efficiently if you can't make a long term plan. That in itself doesn't need to cost any more in fact it can cost less because you don't have the expense of constantly re-tendering.
Senior Manager, Health and Social Care Provider
So the question for us is how much do we invest in people, in time, in services, so do we really want to spend lots on training and services if we lose a contract and they then become a member of somebody else's staff?
Health and Social Care Provider
6.18 A further issue with current short term funding arrangements was what some reported to be the expectation that unspent money would be returned to the funder. Several respondents described situations where their organisation had delivered services to target and under budget and were then subject to demands from a local authority funder for the return of unspent funds.
6.19 The expectation by local authorities that TSOs were willing to return unspent funds rather than invest in the subsequent year's service delivery was perceived to arise from two sources. (1) local authorities and other funders were often seen to view TSOs as substantively different from their private sector counterparts despite being involved in the delivery of similar services. By having a charitable mission rather than being accountable to shareholders, TSOs felt that they were viewed by some local authorities as having no need to retain budget surpluses for re-investment, and (2) some respondents also described a sense that local authorities were more willing to interfere in the activities of TSOs than they would with a private sector counterpart. To support such claims, a respondent cited the case of a local authority that sought to influence the wages that TSOs' staff were paid as a means of reducing the cost of service delivery. As such, a number of respondents in TSOs thought that they were more subject to pressure from local authorities for the claw back of unspent funds.
6.20 There is recognition that the third sector needs to be able to plan service development and requires stability to train and retain staff. The Joint Statement indicates that "As a general rule funders will aim to take a 3-year approach to both grant and contract funding" 35. The Task Group go further and recommend "5 year arrangements where appropriate to be introduced" 36. However, as the SCVO point out, and is supported by our research, "Many current contracts fall short even of the current officially recommended three years". 37
Feedback and Dialogue with Funders
6.21 Several respondents commented that their organisation had experienced significant financial difficulties as a result of funders' delaying contract decisions or the payment of contracts. Respondents described a 'lack of timeliness' in some local and central government funding decisions. A number of TSOs reported receiving notification of funding award several months after the start of the proposed service.
6.22 Another respondent felt there had been an actual change away from being able to negotiate with local authorities - in some instances - about how cuts are implemented:
We're now being confronted quite often with cuts to our budgets...Once we would have had an opportunity to negotiate...and some local authorities are still doing that…'How can we restructure your contracts? What can you offer? Let's do this together'. But some commissioners are taking a very different approach, under pressure from finance - they need to chop money off us and 'this is what we are chopping'.
Senior Manager, National Health and Social Care Provider
6.23 It was felt that local authority funders held considerable power in relationships and their decisions and opinions were not open to question. In particular, some felt that the tendering process suppressed the role played by TSOs in shaping services as consultation with funders is not always feasible in a competitive climate. TSOs now deliver services that funders believe are appropriate and the on-the-ground knowledge held by organisations cannot be fed in. As a result one respondent for example felt that the creativity of organisations such as theirs had been suppressed.
The minute you move into competitive tendering you shut down the dialogue and someone writes what they think that design should be. They put out to you and you write what you think that response should be and then they don't even speak to you. And they won't speak to you. And so that doesn't seem sensible in how you design a mutually benefiting system.
Senior Manager, Employability FG
6.24 The issue of power relations arose during discussion around the activities of some local authorities. Several respondents described anxieties around challenging local authority funders where outcome targets were perceived to be highly ambitious. There was a concern that if they were seen to be questioning targets set by funders, that this would undermine their likelihood of securing future contracts with the funder. However it should also be noted that targets were, in some situations, developed in partnership with funders. As such, these targets were felt to more realistically reflect what could be achieved. Here, a respondent described the emergence of targets through collaboration and discussion with one local authority funder.
I feel that the targets that we have, we have done that in partnership with funders. They haven't said you must get 8 people into employment, four into college. What they have said is 'what is realistic?' If we can get x amount coming in everyday, x amount moving into college, those are sustainable.
Service Manager, Local Learning Provider
6.25 Several TSOs that held large government contracts noted another dimension to the balance of power between funders and TSOs. The rise of contracting as a method for the delivery of public services and the subsequent growth of private and TSOs to deliver government policy was reported to have created an industry of service providers with a powerful lobby that was perceived to have the capacity and strength to approach the government on issues regarding outcome targets that were considered unattainable. A Senior Manager with one TSO which had a contract to deliver government employability services describes how their organisation had greater leverage in negotiations with government as a result of this.
Having created this huge market, it now means that you have a body of organisations that are quite powerful. There is a trade organisation, so there is a way of communicating with government collectively which has grown as the market has grown. That gives us some faith that we are in the same boat as [X] and they are a multi-billion pound organisation that are going to have the same issues.
Senior Manager, National Employability Provider
6.26 It should however be noted that very few TSOs that participated in the research held large central government contracts and were not part of a sector that had the resources to lobby government over such issues. For a majority their income was derived from smaller funding streams that did not place them within a more powerful sector.
Quality versus Cost
6.27 There was a concern among respondents in a number of organisations that local authority funders were more focused on cost rather quality. Some felt that funding decisions should not only be based on price and that best value should be conceived of as more about the quality of services being delivered. For some, the tendering process had placed too much downward pressure on the price of services resulting in service quality being overlooked.
The flaw is [that] in the whole tendering process social value and social benefit has largely been ignored in favour of price.
Senior Manager, Local Employability Provider
6.28 Although procurement processes were supposed to value quality over price, one respondent believed that there was no obvious way in which quality was being assessed as a measure of the value of a bid.
6.29 The perceived lack of methodology for incorporating a measure of the social added value of TSOs was criticised for having led to contracts being awarded on the basis of price and thereby excluding the role of TSOs who found it difficult to compete on price alone. Some felt that the tendering process did not effectively take account of much of the additional work that goes into providing quality services:
It's quite a commercial kind of process and you're talking about often quality services and people's lives and those kind of elements that somehow get ironed out in the tendering process and...there are lots of things that are happening within quality services that take time and effort and you can't sometimes put a price on that.
Senior Manager, Equalities FG
6.30 Several respondents had experience of losing contracts to larger organisations that offered to provide the service at a lower cost. Although the process of competitive tendering may result in greater efficiencies through competition on price and quality, it was also felt that the social aspects and benefits of the service had been lost.
It was a service [where] local people give meals to local people and mental health issues could get picked up and lots of things happened along the way, a much more localised kind of community service. And then they brought in a huge big organisation to do the meals and so it all became frozen…and then some of the human contact gets cut out, it's much cheaper, you don't have to speak to people… [you] stick frozen meals into the deep freeze and that's them fed. Whereas the system where it perhaps cost a bit more was they had social interaction with people.
Senior Manager, Equalities FG
6.31 The Best Value model puts emphasis on both quality and cost. 38 The Social Care Procurement Scotland Guidance consultation document recognises the importance of "quality and continuity of services" 39. However, the overwhelming feeling from the respondents in our research was that the emphasis was on cost over quality.
Other issues in the tendering process
6.32 This section examines other issues where it was perceived that tendering had impacted upon TSOs' capacity to deliver public services. These include the impact of tendering: on the organisation; on staff; on clients; and on the skills requirement of staff.
6.33 Some respondents raised the point that the tendering process was costly and time consuming for both themselves and commissioners. A couple of organisations reported that their staffing levels in HR and finance had to be increased in order to manage tenders. For instance, one respondent described how their TSO created two full time posts for the purpose of writing tenders.
6.34 Another respondent noted that short-term funding made the development of long-term strategy problematic:
' It's quite difficult when you have short term funding to ask what are our assumptions that allow us to build up 5 year projections? And to ask what are our capacity needs? What are our investment needs? What do we need to invest in to support our ambitions for growth?'.
6.35 Many front line staff and managers were concerned about the impact that funding - both cuts in funding but also timely notification of award - had on staff, particularly morale, especially since notices of redundancies could not be issued 40 until awards were confirmed.
Also in terms of staff morale, probably 50% of the team have had issues of redundancy notice posted to them because we knew we had a duty of care to them that we have to inform the team of what the likelihood will be of unemployment. Morale is affected because how are you supposed to continue for our learners if in 2 or 3 months time they don't have a job...
Manager, Regional Learning Provider
6.36 Some felt that short-term funding also had a negative impact on clients in terms of lack of continuity and uncertainty in the on-going provision of the service. This issue was particularly discussed in the field of Social Care where, as pointed out above, the most important aspect of the work was felt to be through developing relationships with service users. This process amounts to a substantial initial investment, which does not represent 'hard outcomes', and also an ongoing preventative dimension, which is also difficult to measure or schedule. While short-term solutions involving volunteers to cover the gaps between funding cycles have been explored by some TSOs, these have been described as unsuitable.
The problem is that a lot of these services [i.e. in particular a family support service] run from week to week or from month to month which makes forward planning difficult to do. The people we support have very challenging lives and do not tend to trust statutory services, so for a voluntary organisation to stop, it then takes a long time to build up the basic relationships...Sometimes it takes that investment of a year or more to build working relationship with families really needing care...At present what we have is families being hesitant about developing these relationships as it is possible the services will disappear, and the communities themselves become hesitant.
Senior Manager, Health and Social Care FG
6.37 Lack of 'parity of esteem' was also mentioned by some respondents whereby they felt that other services and funders did not understand the services that are provided by the third sector and that these are delivered by professional staff. This also had implications for TSOs, for instance, in one organisation there was a concern that salaries within the organisation had not kept pace with inflation and that was disadvantageous in terms of retention of skilled staff.
6.38 It was noted by a number of respondents that specific skills in tendering were becoming essential. This could be problematic for some organisations, particularly smaller ones with fewer staff resources. A number of organisations stated that they felt the strength of many of its staff were in their lived experiences with their local communities and these staff did not always have the skills required for tendering.
6.39 Many TSOs reported that over recent years (in the last decade but particularly in the last 3 or 4 years) some funding had not kept pace with inflation although the same level of service continued to be provided - therefore with the effect of real term cuts. The impact of these cuts included employing lower skilled staff on lower wages and withdrawal of delivery of some services.
6.40 Many TSOs feared future spending cuts of up to 20%. While some perceived this to be an opportunity to reduce dependency on public sector funding, many were concerned about the potential implications of such substantial cuts across the sector. These included vulnerable client groups becoming more marginalised and the loss of some third sector organisations and with them skills, knowledge and service capacity.
6.41 Competitive tendering and high levels of public spending had facilitated an expansion of the third sector over the last decade. However, while tendering created new business opportunities, it also raised a number of challenges for TSOs, including:
(a) Short-term contacts of one-year were reported to have become increasingly common. However, these created difficulties for TSOs in terms of increased bureaucracy and long-term planning as well as lack of continuity for clients;
(b) Some felt there was a 'lack of timeliness' in some local and central government funding decisions, with awards being notified some time after contract start dates. Some also felt that there was a move away from dialogue with funders around service funding and delivery outcomes which was compounded by disparities in power between funders and TSOs;
(c) Although cost and quality are emphasised in the Best Value framework, many respondents felt that the focus of many funders had become too targeted on cost at the expense of quality, and;
(d) The tendering process also had implications for organisations in terms of organisational planning and staffing, security of employment for employees, staff morale and staff skills requirements.