Full Answer
(1) There are fads running through the public and private sectors for performance-based contracts. Much of this work goes under the heading of “applying business-like (read “cash”) incentives to reward good performance and punish bad performance.”
(2) Rewards and punishments in contracting are nothing new. There has been a wide range of incentive schemes that have been used over the years. Some are quite common and familiar, like book advances to authors, with full payment when the book is complete; or penalties for each day a construction project goes past its deadline; or amounts held in escrow pending delivery of products or services etc.
(3) Some approach this subject with almost military zeal. The notion of wielding performance incentives seems to make the role of contract monitor more powerful. But the truth is that successful use of performance measures is a complex undertaking and the details of how it is done will very much dictate whether it will help or hurt the system.
(4) Things that will hurt the system
- Unrealistic standards or expectations.
- Same standards applied to very different providers with different case mixes.
- Emphasis on punishment and penalty, not reward and recognition.
- Using data before you have a track record on what is achievable.
- Collecting too much data and letting the data collection process get in the way of service delivery.
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(5) Things that will help
- Partner with contractors in developing the system of reporting. This should include an open process to identify measures and make recommendations on how measures are used in contracting. It should include training for agency and contract staff on how to identify and use performance measures to improve performance. And it should address how contract improvement targets and, if appropriate, performance standards will be established. It is best to wait until you have a few years of experience before formalizing either.
- Establish a moratorium on penalties until the system has operated for 3 years. This requires some political courage, but is a way to show good faith about fairness, and address the contractors’ fears about misuse of the data.
- Use non-cash rewards (such as greater flexibility for managers in the use of budgeted funds) and individual and group recognition for good (and improving) performance.
- Create safeguards against unintended consequences and perverse incentives, including the incentives to manipulate numbers or skim easy clients in order to meet performance requirements. Where significant cash incentives are involved, underlying reporting should be audited.
- Disseminate best practice information. The object is for contractors to succeed, not fail. And the contracting agency should do everything it can to help contractors be successful.
- Operate the system with low visibility until you are sure you know what you’re doing. Performance systems are as much political and they are technical processes. Be smart about politics. Grow the system slowing while you work out the bugs. Don’t rush into establishing standards. Emphasize performance improvement not the achievement of specific performance targets. Provide lots of space in the process for the story behind the curve. Share successes and when asked, be honest about low performance. This is a time to say “This is the reason why we put this system in place – to identify and improve performance…”
- Collect comparable data and track other state and national efforts so that you know what is comparable (and what is not comparable) performance elsewhere.
- Finally, practice what you preach. Agencies issuing contracts or making grants should also use performance measures to assess their own performance and work to improve. For example, contracting agencies should regularly monitor how long it takes to process a contract and pay an invoice. And should commit to using performance measures throughout the agency.
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(6) Contract language itself should set up a regular reporting process and process for joint quarterly review of progress against baselines. Contract reporting can actually use the progress report categories 2,3, and 4 from the Progress Report Prototype
(7) Questions all grantmakers should ask themselves and their grantees:
- How does your grant fit into a larger strategy to improve the well-being of a (whole) population (e.g. all children, all elders, all citizens in a geographic area)?
- How would your customers be better off is your grant/project provided good service (was successful)? How could you measure that?
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