Payment by Results in FE: a System Shift Dressed Up as a Funding Reform

Written By Andy Hyde

Why Milburn's outcomes-funding proposal will redirect power away from young people — and what to do instead.

Payment by Results in FE: A System Shift, Not a Reform

In the FE Week response to Alan Milburn's interim review, one line captured what is coming next: "Until colleges are funded for outcomes not headcounts, until the post-16 cliff edge is bridged and the young people the system loses are the young people it works hardest to hold, the tail of failure will persist."

The intuition is reasonable. Of course colleges should care whether their students find work or further training. Of course headcount funding rewards enrolment over progression. Of course something needs to change.

The problem is not the diagnosis. It's that we have run this experiment before, in this country, in adjacent parts of the same skills and employment system. It produced predictable, well-documented, expensive failures. And there is no indication, anywhere in the interim review or in the FE Week reporting, that the lessons of that experience have been absorbed.

A short history of payment by results in UK careers and employment services

Payment by results (PbR) in UK careers IAG and welfare-to-work began under New Labour and accelerated under the Coalition. Connexions began the shift toward outcome-tied funding. Pathways to Work, the Flexible New Deal, and most importantly the Work Programme (2011–2017) became its full expression. Outcome-tied funding then spread into youth offending services, drug and alcohol treatment, troubled families, and homelessness. By 2015, the National Audit Office identified more than fifty active PbR schemes across UK government.

I ran a company called The Outcomes Group during much of that transition. We collected outcomes data for careers IAG providers who needed to evidence destinations and progressions for their funders. We sat close enough to the engine to see what was actually happening to the system, not just what the prospectuses said.

Three things became unmistakable.

What goes wrong, in three predictable steps

1. Money concentrates with whoever can shoulder the risk

PbR requires providers to deliver service first and get paid later — often six, twelve or eighteen months later, contingent on outcomes that may never arrive. Only organisations with deep balance sheets or access to social-investment capital can carry that risk. The Work Programme's "prime contractor" model formalised this: a small handful of large providers — A4e (later People Plus), G4S, Maximus, Ingeus, Serco — won the lion's share of contracts. The vibrant ecosystem of small, specialist, community-rooted careers and skills providers either became subcontractors at the bottom of the supply chain on punishing terms, or were squeezed out altogether.

This was not a side effect. It was a direct consequence of the funding architecture. The financial model decided who could play before the question of who delivers good service was ever asked.

2. Providers "cream and park" — predictably, and on a documented industrial scale

The Work Programme deliberately included tiered payment groups, designed to discourage providers from cherry-picking the easiest cases. They didn't work. Carter and Whitworth's 2015 paper in the Journal of Social Policy concluded that creaming and parking were "designed in rather than designed out" of the programme. Russell Webster's review of the PbR literature found "a consensus amongst official evaluations and third-party research on the Work Programme that creaming and parking are widespread within its contracts."

Even when an outcome payment for a disabled jobseeker is double or triple that for a more "job-ready" claimant, the additional payment rarely covers the additional cost and risk of working with them. A rational provider, under a rationally designed contract, will still focus resources on those most likely to convert. The flow of money skews toward people who were going to progress anyway, while those who need the most expensive, most time-consuming, most uncertain support quietly slip out of focus.

3. The purpose of the system shifts — and the young person is no longer the centre of gravity

This is the most important point and the hardest to convey to people who haven't watched it happen. When you pay for measurable outcomes, the things that can be measured become the things that the system can see. Everything else becomes invisible — not because anyone in the system is callous, but because the funding mechanism has structurally narrowed what counts.

A young person who needs eighteen months of confidence-building and identity development before any job placement is plausible becomes an unattractive proposition. Not to their teacher. Not to their key worker. Not to anyone in the room with them — but to the spreadsheet that decides whether the provider gets paid. Multiply that by every commissioner, every quarterly board meeting, every contract renewal, and the cumulative gravitational pull is overwhelming.

The McNamara fallacy, applied to a national skills system

This is the McNamara fallacy in operation. Robert McNamara, US Secretary of Defense during the Vietnam War, made body counts the primary index of American military success — because that was what could be measured. The body count went up. The war was lost. Jerry Z. Muller's The Tyranny of Metrics (2018), and Donald Campbell's Law before it ("the more any quantitative social indicator is used for social decision-making, the more apt it will be to distort and corrupt the social processes it is intended to monitor"), describe the same phenomenon. We see what we count. We stop being able to see what we don't count. Eventually we convince ourselves it didn't matter.

In FE, what gets counted by an outcomes-based funding model is a job placement, a sustained employment outcome, or a destination into further training within a defined attribution window. What does not get counted is the messy, slow, individual work of building agency, resilience, critical thinking and belonging in young people whose previous experience of education has been one of repeated failure.

A systems view: where power actually shifts

Charles Leadbeater and Jennie Winhall's The Power to Shift a System (2021) argues that systems are held together by four interlocking elements: purpose, power, relationships and resource flows. Change one and you change them all. Crucially, who holds power over the system is what determines whose interests the system ultimately serves.

A shift from headcount to outcome funding is not a neutral tweak to a payment mechanism. It is a redistribution of power:

Power moves toward large primes and their financial backers — the institutional investors and social-investment funds that underwrite working capital. Decisions about which young people are economically viable to support flow upward to capital, not downward to communities.

Power moves toward employers, who become the de facto arbiters of what counts as a successful outcome. The young person's growth becomes legible to the system only when it converts to an employer's hiring decision.

Power moves away from front-line educators and youth workers, whose professional judgement about what a particular young person needs is overridden by the contract's payment triggers.

Power moves away from the young person, who becomes an input to a payment cycle rather than the centre of the work.

Leadbeater and Winhall point out that the soft power of a system — its taken-for-granted values, its dominant frames — is at least as important as its hard power of rules and budgets. Outcomes-based funding does both at once. It rewires the hard wiring of who gets paid for what, and it imports a soft framing in which the language of "value for money", "attribution" and "sustained employment outcomes" displaces the language of vocation, identity, formation and care.

Why this matters specifically for RC Vision

We work with young people who are underrepresented in STEM and most at risk of disengaging from school and work. The change we are trying to produce in them — and the change the research literature says they actually need — is the slow accretion of a different identity. Engineer. Builder. Racer. Someone whose hands and head work together. Someone who belongs in a workshop.

That work is necessarily longitudinal. It does not show up in a six-month outcome window. It often does not show up in a twelve-month outcome window. Its eventual expression — in apprenticeships taken, in university courses started, in jobs entered, in lives steadied — happens on timeframes a PbR contract cannot see, and therefore cannot pay for.

Confidence. Resilience. Flexibility. Critical thinking. Belonging. The Royal Academy of Engineering calls these engineering habits of mind. Schools call them character. Employers, soft skills. Funders, in private, often call them "the things that actually matter". A payment-by-results funding model for FE would systematically defund them — not because anyone decided they didn't matter, but because the contract architecture cannot see them.

For RC Vision, and for hundreds of other small, specialist, community-rooted providers doing this work across the country, a PbR future is not an inconvenience. It is an extinction event.

What we'd want instead

The honest answer to the question Milburn is asking — how do we redesign incentives so that the system holds onto the young people it currently loses? — is not "redesign the funding mechanism for the fourth time".

It is to put the young person back at the centre of the system. That means, at minimum:

  1. Mixed funding models, in which a meaningful proportion of provider income is not contingent on outcome triggers, so that providers can afford to work with the young people who need the most. The NAO recommended exactly this in 2015. It is not a new insight.

  2. Flexible success measures, as the Joseph Rowntree Foundation has been arguing for years — measuring engagement, progression and sustained participation alongside hard employment outcomes.

  3. Funding informal and community-based learning as infrastructure, not as a downstream subcontract to a national prime. The providers most likely to reach the young people Milburn is worried about are exactly the ones a PbR architecture will kill first.

  4. A serious conversation about employer responsibility, as Josh Thorne pointed out in the comments under the FE Week piece. Outcomes-based funding without addressing the employer side of the equation will systematically penalise colleges and providers in disadvantaged areas. Singapore's SkillsFuture model is the obvious reference point.

These are not radical proposals. They are well-rehearsed lessons from the last twenty years of UK public service commissioning, hiding in plain sight in the NAO archive.

Get in touch

If you work in policy or commissioning, in a funder or a foundation, or in a college or trust thinking about how to respond to the Milburn review, we'd like to be in the conversation. The autumn recommendations need to be informed by people who remember what happened last time. We'll be saying so to anyone who'll listen.

andy@rcvision.co.uk

Sources and further reading

Andy Hyde
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