The Opportunities and Challenges of the Changing Public Services Landscape for the Third sector in Scotland: A Longitudinal Study (2009 - 2013): Year 4 and Final Report

3 Impacts Of Policy and Fudning Change on Third Sector Organisations

Summary of Key Findings

Chapter 3 summarises the main policy and funding changes over the four years of the study and their impacts on the third sector.

Changes in the Policy Environment

• While the principle of localism is often supported, the impact on third sector organisations in practice had been more problematic e.g. organisations having to negotiate with numerous local authorities and 'disconnected' policies.
• The move to greater personalisation of services is seen as a positive step. However, third sector organisations perceive that most Scottish local authorities have yet to fully implement the Self-directed support (SDS) agenda and there are concerns that some local authorities are using it as a cost-cutting exercise.
• Awareness of the recommendations of the Christie Commission was more widespread among third sector organisations in Year 4. While most supported the recommendations and cited that it was an approach that many third sector organisations were taking already, there was concern that there was no additional funding to help third sector organisations implement the recommendations of the Commission.
• The majority of participants engaged with the Work Programme have found that it has presented challenges rather than opportunities e.g. few referrals of clients to third sector organisations, and a loss of funding.
• Most participants stated that they had not prepared for the Scottish independence referendum.

Changes in the Funding Environment

• A persistent theme across each of the four years has been the problem of securing core funding and maintaining internal capacity. The reduction in the availability of funding for core costs has had an impact on the capacity of third sector organisations to retain head office staff, pay for staff training etc..
• In order to facilitate the greater involvement of third sector organisations in service design, the Public Social Partnerships (PSP) model has been developed in recent years. However, experience of them remained limited across the participating organisations.
• A theme emerging from interviews with third sector organisations in Year 4 was the use of re-tendering by local authorities, for services already being provided by third sector organisations. Re-tendering was understood by third sector organisations to often be a cost saving exercise on the part of local authorities.
• The issue of funders and commissioners not meeting their own schedules for announcing the outcomes of tenders was becoming an issue in Year 4.
• The problems of cash flow for third sector organisations were also not always recognised.
• Despite the challenges faced by standstill funding or funding cuts, many third sector organisations also felt that some new opportunities for funding were emerging.

Performance and Outcome Measures

• In Year 4 previous trends in measuring outcomes continued e.g. a focus on outcomes rather than outputs and increased compliance and scrutiny. Some organisations had experienced some changes in the systems used by funders and commissioners to measure outcomes, or had made alterations to their own internal systems.
• The theme of inconsistency in funders and commissioners regarding reporting performance and outcomes (relevant in Year 1-3) continued. Some organisations had tried to directly engage with funders and commissioners to develop universal monitoring or had improved their own internal systems in order to address these challenges.
• The theme of inconsistencies in funders and commissioners information requirements continued, with additional resources having to be spent on providing similar information in different ways.

3.1 This chapter summarises the main policy changes over the four years of the study and how the changes to the funding environment has impacted on third sector organisations. This includes an examination of key Scottish Government policies and related issues such as localism, personalisation /Self-directed support, the Christie Commission and other policy priorities.
A major UK Coalition Government policy over the last two years has been to reduce the UK deficit, of which reductions in spending on public services, including the Scottish Government's core funding, are a key component. In addition, the Work Programme has been introduced. This chapter examines the: changing policy environment; extent to which third sector organisations in Scotland have experienced the effects of funding cuts over the course of the study; trends in tendering for services; and some of the new opportunities that may be opening up in the changing environments. Appendix E presents the changes over time in four of the case studies.

Changes in the Policy Environment

3.2 There have been a number of significant policy changes that have affected third sector organisations over the course of the four years of the research. This section considers: Localism, Personalisation and Self-directed Support, the Christie Commission, the Work Programme and the potential implications for the third sector of the forthcoming Scottish independence referendum.

Localism

3.3 In Year 1, one of the key policy changes was the Scottish Government's Concordat with local authorities, which was underpinned by the 'localism' principle. While this was in principle often supported by the third sector organisations participating in our study, the impact on them in practice had often been problematic as organisations now had to negotiate with numerous individual local authorities and some felt that the focus on local needs may have resulted in a decreased ability to see the 'bigger picture' of policy and provision. In addition, some felt that localism had created an 'accountability gap' where it was not clear whether national or local government had responsibility for policy. In Year 3, one point commonly made by interviewees concerned what they perceived as 'disconnected' policy (e.g. disconnect between policy and practice amongst local authorities and between the UK and Scottish Governments, as well as different policy areas operating in silos rather than joining up).

3.4 These issues continued to be important in Year 4. Participants questioned the different ways in which national policies were interpreted by local authorities; and large organisations operating across local authority areas identified the difficulties in engaging with numerous local authorities because of their perceived inconsistency in approaches. Some felt that Community Planning Partnerships (CPPs) were in some cases a 'closed' group that third sector organisations had found difficult to engage with, for example:

"In some ways consistency is much more important than simplicity…32 local authorities remain too many to have a relationship with" (Senior Manager, Employability Provider)^[6]

"…I guess around the partnership and partnership with CPPs is the inconsistency in terms of how those partnerships work. It is a hugely frustrating and difficult thing to manage" (Manager, Employability Provider)

3.5 The involvement of the third sector organisations in CPPs continued to be 'patchy' in Year 4, with a lack of resources often cited as a reason for this or the perceived lack of relevance to third sector organisations - although one participant did argue that if third sector organisations became more engaged with CPPs then they might become more relevant to the needs of the third sector, as follows:

"Again we have had very little engagement with community planning partnerships. I think it is seen very much as a huge talking shop with a huge number of players involved in it and very little purchase on what's actually kind of going on" (Senior Manager, Employability Provider)

Personalisation and Self-Directed Support

3.6 Personalisation is being introduced in Scotland to bring about a change to the way in which public bodies and professionals provide services (Scottish Government, 2010b; Scottish Parliament, 2012). It is intended that under this agenda of personalisation that service users become more involved in how services are designed and that they receive support that is most suited to their needs. As such service users are not passive recipients of care, rather partners in the process of decision making. Self-directed support is one way of pursuing the policy of personalisation in Scotland, and the Social Care (Self-directed Support) (Scotland) Bill in February 2012 (Scottish Parliament, 2012) received Royal Assent in 2013. The Act provides service users (adults and children) with a high level of involvement in the way in which their care is arranged.

3.7 While personalisation was discussed by some participants in Year 1, it became an increasingly prominent concern in Years 2 to 4, particularly for those third sector organisations working in health and social care, as it was a key policy for the SNP Government re-elected in May 2011.

3.8 In Years 1 to 3, many of those who discussed personalisation were supportive of devolving power to service users and many had been preparing for personalised and Self-directed support (SDS) for some time. Personalisation was seen to present both opportunities and challenges as the balance of power between local authorities, care providers and service users changed, and health and social care third sector organisations had to change their landscape of service provision (e.g. moving from institutional care provision to personalised care often in the community; different methods of payment for services; lack of ability for third sector organisations to make long term plans; having to seek different ways to meet infrastructure and fixed costs; the potential loss of economies of scale and high costs of the greater numbers of individual transactions). There were concerns about the ability of clients to navigate and choose the most appropriate services for their care, as well as concerns about moving to a way of working flexibly enough to meet potential demand.

3.9 In Year 2, third sector organisations pointed out that there were disparities across local authorities in the conceptualisation and implementation of personalised social care. By Year 3, third sector organisations also noted varied approaches within local authorities, with some planning to run with the policy later on in the year and others planning to wait several years before rolling it out, while a small number had already been preparing for the move toward personalisation of services. In Year 3 it was also felt that personalisation would likely change the relationship between third sector organisations and local authorities. With the introduction of personalisation, local authorities were likely to increasingly see their role as purchaser of services decline as service users gain control over their care budgets.

3.10 In Year 4, third sector organisations involved in the delivery of social care services viewed the move to greater personalisation of services as a positive step towards ensuring that their service users could exercise greater control over the way in which their services were provided. However, it was also apparent that most Scottish local authorities had yet to fully implement the SDS agenda. With the exception of some local authorities that were cited by the health and social care providing third sector organisations as being in the vanguard of SDS delivery, local authorities in general were not perceived to have introduced SDS in a wide ranging manner. Even those local authorities who were perceived to be at the forefront of SDS were not necessarily introducing it in a way that gave full control of budgets to service users, as local authorities continued to maintain the funds. For example:

"So while we are working with local authorities who are introducing SDS, we haven't seen the obvious things. We haven't seen a major shift in how we contract with the individual… [local authorities] are still maintaining the funds. So individual budgets are being prepared, but in most cases the funds flow directly from the local authority to [third sector organisation]" (Senior Manager, Health and Social Care Provider)

3.11 It was clear, however, that whilst in previous years a small number of pioneering local authorities had pushed ahead with an SDS agenda, the remaining local authorities were now making more detailed preparation for the introduction of SDS in their social care arrangements. A participant noted:

"[Names of two local authorities] in particular have been really proactive and are driving the agenda forward at quite a significant rate. Others I think are just biding their time preparing and watching what's happening…and will act once they have to I guess" (Senior Manager, Health and Social Care Provider)

3.12 In Years 1 to 3, some third sector organisations were concerned that personalisation was being used explicitly by some local authorities as a cost-cutting exercise and was not about a genuine reform of services. Again in Year 4 some health and social care providers described a perception among some service users and third sector organisations that the reassessment of personal care packages taking place prior to the introduction of SDS were being used by local authorities to introduce cost saving measures. Service users and care providers were aware of the financial pressures on local authorities to find ways to reduce spending as part of the wider public spending reviews. There was a perception among some service users and third sector organisations that the reassessments taking place as part of the introduction of SDS created opportunities for the closure of traditional building-based services and the introduction of revised personal assessments, under a Resource Allocation System, that reduced the number of care hours some service users were entitled to. For example:

"…there is definitely a feeling in some areas, and perhaps for good reason, that personalisation and cuts are one in the same thing and that is beginning to damage the reputation of Self-directed support…if you are the person who is going through an SDS process and coming out the other end of it with a grand less to spend on a service than you went into it, then you can understand why people would be rather cynical" (Senior Manager, Health and Social Care Provider)

The Christie Commission

3.13 The Christie Commission on the Future Delivery of Public Services was established by the Scottish Government in November 2010 and published its report in June 2011 during the second year of this study. The Commission recognised that demand for public services will increase in the future as a result of demographic change but also as a result of the need to tackle poverty and disadvantage. It recommended that public service providers must: work closely in partnership to integrate service provision; prioritise expenditure on public services which prevent negative outcomes from arising; become more efficient by reducing duplication and sharing services wherever possible. The Scottish Government (2011a) responded positively to the Commission's report and emphasised: a decisive shift towards prevention; greater integration of public services at a local level driven by better partnership, collaboration and effective local delivery; greater investment in the people who deliver services through enhanced workforce development and effective leadership; and a sharp focus on improving performance, through greater transparency, innovation and use of digital technology.

3.14 Awareness of the recommendations of the Christie Commission was more widespread among third sector organisations in Year 4 than in Year 3, but some of the participants had limited awareness of the Christie Commission report, or if they had, were not really sure of its content and recommendations or whether it had really filtered down to effect on the ground service delivery. Similarly one participant felt that while they themselves were aware of the principles of the Christie Commission they were unsure that these principles had filtered down to local authorities.

3.15 Of those participants who were aware of the Christie Commission report, most were aware of the Commissions' desire to emphasise the importance of preventative approaches (although some felt that the prevention and early intervention agenda was being confused with the early years agenda, when in fact these were two different areas). There was less awareness of the other recommendations of the Commission. Widespread awareness of the preventative spend agenda could be attributed to the application of this approach in the Scottish Spending Review 2011 and Draft Budget 2012-13 and across other streams of Scottish Government policy. A few of the participants were aware of the increased need to evidence their work, in relation to the Christie Commission recommendations, and were taking steps to do this.

3.16 Senior managers with responsibility for budget management emphasised that whilst the recommendations of the Christie Commission helped clarify Government thinking on approaches to the third sector, it did not come with any additional funding to help third sector organisations implement the recommendations. A participant said:

"[The] Christie Commission was good because it brought that to light and vocalised that. Like everything else with early intervention the earlier you provide an outcome the better that outcome is going to be. We still get the rhetoric but like everything else, if you don't resource it and resource it properly and so with recommendations from Christie that's front ending the interventions. It's going to be quite costly at the front end, but it should save you in the long term. But they are not resourcing it" (Senior Manager, Learning Provider)

3.17 Other participants were concerned that unless new resources were made available to address early intervention and prevention, existing resources could be directed away from current service users. Conversely others felt that because of tight budgets, addressing 'crisis' rather than 'prevention' would remain a priority for local authorities. For example:

"I still think there is a lag between the intention and the language and the reality. Because if you have a tight budget in a local authority...you have got to deal with the front of the crisis" (Senior Manager, Employability Provider)

3.18 A senior manager in a social care organisation described a widespread awareness of the need to act preventatively and provide best value in line with the Christie Commission, but also emphasised how this overlapped with existing organisational policies and thinking. The Christie Commission was perceived to be one of a number of drivers that were making the organisation more efficient, to act preventatively and work in partnership. Other major drivers of change included: compliance with mandatory training for staff providing front-line care services; human resources law; and fulfilling the requirements of funders and commissioners whilst offering a wide range of services.

3.19 More generally some participants felt that the Christie Commission was articulating ideas that had been of a concern to the third sector for many years. Therefore, it was not really saying anything 'new', although it provided a useful reference point in bids for example, as follows:

"I don't mean to be dismissive of it, it very much I think gave some weight to a lot of the ideas that the third sector has been talking about for a long time. So that's a good thing" (Manager, Employability Provider)

The Work Programme

3.20 The Work Programme introduced in June 2011 (Year 2) replaced a number of previous employability funding streams (e.g. the New Deal) and aims to get mainly long-term unemployed people back to work with the use of third-party suppliers. A small number of large 'prime contractors' were contracted to deliver services in specific regions across the UK. The programme is based on payment by results (payments based on agreed and specified outcomes recorded, e.g. a client gaining and/or sustaining a job), so the majority of payments to providers are only made after a person previously on benefits starts work and remains in employment for well over a year. The prime contractors have different strategies, but usually provide some services in-house and sub-contract specific areas of work to other organisations, often smaller, third sector specialists.

3.21 During the Year 2 fieldwork period the outcomes of the Work Programme bidding process were unknown. Many of the more employability focused third sector organisations had been involved in developing partnerships as sub-contractors with a range of potential 'prime contractors' since the Work Programme would be available to a relatively small number of very large organisations. This was felt to have been very time-consuming and it was a period of great uncertainty. When the results of the bidding process were announced in April 2011, the two prime contractors in Scotland were both private sector organisations (Ingeus and Working Links), although the sub-contractors included third sector organisations. In Scotland, one third sector organisation had unsuccessfully bid to be a 'prime contractor'.

3.22 By Year 3, a number of the third sector organisations had engaged with the Work Programme as sub-contractors. Organisations reported investing a significant amount of time and money preparing for delivery of the programme. Organisations invested in the development of proposals as part of the tendering process, on the development of relationships with prime contractors and the development of new products that would fit with the anticipated requirements of the Work Programme. However, there were very few referrals received by these organisations through the Work Programme, and very few organisations had received any significant income through the Work Programme because of this. As a result of the outlay third sector organisation sub-contractors had invested in order to meet potential demand (e.g. recruited or re-deployed staff), some third sector organisations in Year 3 were not able to cover their costs. It was perceived that the prime contractors were reluctant to engage with sub-contractors as they wanted to create an end-to-end service. The participating third sector organisations were concerned that very vulnerable clients would be left without support, as the prime contractors would concentrate on those closest to the labour market.

3.23 In Year 4 the participants engaged with the Work Programme were able to reflect further on their experiences. In the main, their experiences reflected those from Year 3. Engagement with the Work Programme represented a considerable risk for four reasons.

3.24 Firstly, engaging in the programme had meant that organisations had to make considerable up front outlays because of the resources needed to meet compliance targets and prepare the bid. As the Work Programme replaced previous funding streams, organisations also lost resources and in some instances this meant that previous staff numbers could no longer be supported. For example:

"…there was an awful lot of development work…In terms of costing that whole development process we spent in the run up to that there was significant investment on it. And we anticipated getting a lot more back from it than we ultimately did" (Manager, Health and Social Care Provider)

3.25 Secondly, sub-contractors had no control over the volume of referrals being made by prime contractors. It was reported that third sector organisations had received few referrals and therefore not many payments as the programme operates on payment by results, as a participant emphasised:

"Being a sub-contractor you can't control the number of referrals… there will come a time when I think a lot of third sector organisations make a choice about coming away from programmes like that, that are too low cost, high targets, are not delivering the service we want for our customers and staff put under pressure that we're not prepared to do" (Senior Manager, Employability Provider).

3.26 There was a belief that the volume of referrals was lower than expected because the prime contractors were seeking to reduce the number (and associated costs) of referrals to specialise sub-contractors either by trying to do this specialist work themselves, or by not addressing these additional support needs and 'parking' the Work Programme clients who were furthest from being employment ready. A further key issue for third sector organisations involved in the Work Programme as sub-contractors was that the payment model pushes financial risk down the supply chain. Third sector organisations have specialist knowledge and skills that can offer employability support to those furthest from the labour market. However, these individuals, whom the prime contractor had assessed as being unsuitable for their own mainstream provision, represent a considerable financial risk to the third sector organisation.

3.27 Thirdly, there was no guarantee that job outcomes would be achieved due to the complexity of the cases being referred from the prime contractors. One third sector organisation reported that those referred to them had not undergone the pre-work (to improve their employability) that they were meant to have before being referred and therefore the third sector organisation had to spend time and resource addressing these issues. Even if organisations were able to get service users to a stage where they were job ready, there may not be jobs for them to go in to if the economy is weak. The pressure of the payments by results approach and the timescales that some sub-contractors had to get people into work presented a great challenge.

3.28 Fourthly, as one participant argued, the effects of the Work Programme were going to become more complex as service users came off the programme after two years, and if they were not successful, become eligible to engage with other employment support, as follows:

"I think we're about to get the brunt of it again because the two years of the Work Programme now ends and they come off Work Programme - people who have not successfully gone into work through Work Programme…So they've not been successful through all the effort of the Work Programme and now they are going to be dropped back into our provision and we're expected to be able to do something with them" (Senior Manager, Employability Provider)

3.29 As a result of these experiences, organisations questioned whether they would engage with similar programmes (requiring up front funding and payment by results) in the future. For example:

"We will be very unlikely to enter into any payment by results contracts where there is an upfront financial investment that we don't feel has a degree of certainty. Obviously we will appraise each one as it comes out" (Senior Manager, Employability Provider)

3.30 Even those who were not contracted through the Work Programme noted that it was still having an impact on them, for example because referral routes that had existed previously had disappeared, as follows:

"...we are for instance receiving direct referrals of potential clients coming to our services who have been directed by Job Centre staff who don't have the referral routes they previously had and left them nowhere to go, and they're saying phone us. Now there is a slightly dripping tap into the sink, we have certain capacity and that will spill over" (Senior Manager, Employability Provider)

3.31 However, there were some exceptions to these negative experiences that are perhaps worth reflecting upon. One third sector organisation for example cited that they had had positive experiences of the Work Programme having achieved good outcomes, although they did note that the set-up of the programme itself did have some limitations. This third sector organisation felt that the Work Programme had brought some higher levels of compliance and greater discipline to organisations that are involved but that it was not good for supporting those jobseekers that needed the greatest levels of support. The third sector organisation had specifically ensured in their financial planning that they were not solely reliant on potential income from the Work Programme (a strategy also undertaken by another participating third sector organisation), and felt that where many other third sector organisations had encountered problems was when actual income had not met expectations. The third sector organisation did identify that they were probably very lucky in their experiences.

3.32 As well as the Work Programme, in Year 4, some organisations had contracts under the non-mandatory Work Choice^[7] programme. This was not a significant source of income in either case.

The Independence Referendum

3.33 On October 15, 2012, the 'Edinburgh Agreement' was signed by the First Minister and the Prime Minister. The Agreement ensured that the Scottish Parliament is able to deliver a referendum. In March 2013 (Year 4) it was announced that the Scottish independence referendum would be held on September 18, 2014. The White Paper was published on 26 November 2013.

3.34 The participants were asked how, if at all, they were preparing for the 2014 Scottish independence referendum. It should be noted that the majority of the interviews were conducted before the date of the referendum was announced, (and all before the White Paper was published), which could have had some bearing on the responses. Even those interviews conducted after the date of the referendum was announced, the interview was only a short time after the announcement, and therefore organisations may have not had time to review or consider their approach.

3.35 The majority of participants stated that they had not prepared for the Scottish independence referendum - only in one organisation were any formal preparations and a review of strategy cited; others mentioned that conversations would be held but that these had not yet happened. For one participant there were greater priorities in the shorter term, such as guaranteeing funding. They felt that the outcomes of the referendum would only be felt and affect the third sector beyond 2015 as there would need to be a period of readjustment. For example:

"To be honest at the moment I am keeping my head above water just making sure that we have our contract for next year. Over the next few months we will be really worrying about whether we have to tender for our service" (Senior Manager, Employability Provider)

"It is going to take some time for everything to change" (Senior Manager, Health and Social Care Provider)

3.36 This view of there being more pressing issues to be addressed in the shorter term was reiterated by participants from other organisations, as follows:

"If I am really honest it is not something I have really thought about. If I was to be honest I have other fish to fry. So it's not something I have given a lot of thought to" (Manager, Learning Provider)

3.37 The interview and focus group data does not indicate that the participating third sector organisations were campaigning in relation to the referendum and many were keen to stress that they did not have a position on the referendum. One participant felt that it was important that their organisation "keep [their] head down" (Senior Manager, Health and Social Care Provider) and other participants also stressed that it was important for their organisations to remain a-political. Some participants had considered the implications of the outcomes of the Scottish independence referendum on the policy environment and the delivery of public services more generally. One issue considered was the implication for UK wide third sector organisations versus third sector organisations who only operated in Scotland. One participant felt that because their third sector organisation only operated in Scotland the implications would be quite limited. They said:

"Because we are a purely Scottish based charity, it's different for the bigger UK wide organisations, we operate exclusively in Scotland, then we are quite confident that the implications for us will be relatively limited" (Senior Manager, Health and Social Care Provider)

3.38 The area of public service delivery that the third sector organisations operated in was also an important consideration for the participants i.e. did they deliver services in a devolved or non-devolved policy area. For a participant from a third sector organisation delivering services in the area of health (a devolved policy area) the effects of the outcome of the Scottish independence referendum were not seen to be great as they already worked closely with the Scottish Government. Participants working in the area of employability (a non-devolved policy area) did, however, cite the potential implications, especially the opportunity for the third sector to play a role in future policy design. A participant noted:

"I think the whole area of employability is a critical one because it's partly devolved and partly not devolved and I think whether we have independence or greater devolution of powers it is clearly an area that we could make significant improvements in the way we work...[it's an] opportunity for us to raise issues and make proposals" (Senior Manager, Employability Provider)

Changes in the Funding Environment

3.39 Throughout the duration of this four year study, the issue of funding has become the paramount issue for most participating third sector organisations. This was partly related to the austerity budget environment that encompassed the UK (and other parts of the world) and the potentially limited public and private sector resources at UK, Scottish and local authority levels. This section explores trends in the types of funding available, the commissioning models used by funders and commissioners and new funding opportunities for third sector organisations.

The Types of Funding Available and Spending Reviews

3.40 In Year 1 of this study there was an expectation that the response to the public deficit would lead to significant cuts in funding for public services. Given the third sector's close involvement in the delivery of public services across the Scottish public sector, it was anticipated that this would have a negative effect on their capacity to deliver public services. At the same time individual and private sector financial support for third sector organisations were thought likely to decline and the demand for many third sector services were expected to rise (partly to compensate for expected lower levels of public services and higher unemployment). Year 1 could be characterised by the presence of 'anticipatory anxiety' about possible future funding cuts and their meaning for organisations and staff. In Years 2 to 4 the impacts of the funding cuts were being felt in practice. By Year 4 two participants had started to reflect that cuts in budgets had now become the norm, as follows:

"I think when we started talking three or four years ago it was all about the cost cutting. I think organisations have got over that" (Senior Manager, Health and Social Care Provider)

"I would say I have had a good year, I have had standstill budgets or three to five per cent cuts and I had forecast 10 per cent so that's a bonus for me. What we have to say is that we have come such a long way in Scotland…10 years ago there would have be shouts and fighting and bawling" (Senior Manager, Learning Provider)

3.41 A persistent theme across each of the four years has been around the problem of securing core funding and maintaining internal capacity. In Year 1, organisations were aware of the possibility that, in a challenging funding environment, there would be greater pressure on the availability of core funding to support infrastructure costs and retain internal capacity. By Year 3 organisations had started to experience cuts to core funding whilst some were also using funding through the Unified Voluntary Sector Funds (UVSF) and the Community Learning and Development Headquarters Fund (CLD HQ). The UVSF was established in 2004 and invested in about 90 third sector organisations with a focus on children, families and young people. However, a review of the UVSF was completed in 2012 and concluded that 'the funds had been operating with little change for a long period of time. This had led to lack of purpose, a difficulty in demonstrating impact and administrative systems that required improvement' (Swann, 2012). In 2012-13, the UVSF was wound up and replaced by a new £20 million Third Sector Early Intervention Fund managed by the Big Fund (the non-Lottery arm of the Big Lottery Fund). Of the £20m funding available through the early intervention fund, £14m was intended for investment in organisations, with the remainder for investment in projects.

3.42 A number of the third sector organisations had applied for the Third Sector Early Intervention Fund and provided feedback of their experiences. First, it was felt that the turnaround for putting in the bids was extremely tight. The funding was announced just before Christmas and because of the Christmas and New Year break realistically organisations only had a few weeks to prepare their applications. Second, the outcomes of the process were not announced when they were scheduled to have been which was frustrating for the participants, although those who were in receipt of UVSF did get a month's additional funding from the Scottish Government. Some questioned as to whether this was because more applications than expected had been received. For example:

"The timescales were ridiculous. It went out before Christmas with a response, knowing that people were likely to be on holiday for two to three weeks" (Senior Manager, Health and Social Care Provider)

3.43 In addition, there were issues about the timing of the feedback, in relation to another funding stream. For example:

"So for me whilst there was quite a quick turnaround for the application, what was more frustrating was that we were all meant to have heard by the end of March and we didn't" (Senior Manager, Health and Social Care Provider)

3.44 More generally, the importance of having access to funding for core costs was emphasised by a senior manager from a learning provider. The participant described how a reduction in the availability of funding for core costs would impact on the capacity of the organisation to retain head office staff, as follows:

"We would lose the physical premises entirely. We would keep on certain key staff including finance and admin. But IT would be outsourced. But we would need an office somewhere for filing cabinets because people don't have room in their homes, basically people would be working from home. There would be reduced hours for admin and finance…" (Senior Manager, Learning Provider)

3.45 As the availability of funding to meet core costs reduced, there were fewer opportunities for staff training which would further impact upon the capacity of the organisation to sustain and promote good practice in the delivery of high quality services. A participant noted:

"So in a way the training and development part used to be taken for granted as it was essential is becoming much more of a luxury in the organisation" (Senior Officer, Learning Provider)

3.46 In Year 4, most of the organisations that participated described compromises on internal capacity being made to meet reductions on the availability of funding for core costs. There was a widespread view that funders and commissioners were reluctant to meet the costs of maintaining a headquarters and other associated activities related to the management of an organisation. Subsequently, organisations were increasingly seeking cost saving measures from their core costs that could ensure the continuation of front-line service delivery. However, large professional organisations with statutory responsibilities, registered with regulatory bodies such as the Care Inspectorate and the Scottish Social Services Council, continued to have costs associated with compliance and quality control that are an integral part of delivering a high quality public service.

3.47 Other trends regarding the types of funding available were a reduction in income and the short timescales of the funding that was available. This made it difficult for organisations to make plans, as emphasised by participants:

"Everybody only ever wants to fund on a short term basis, one year or three years. You know you cannot get a long term outcomes from short term projects. And we need to stop being terribly short term in our thinking; we need to have a much longer view" (Senior Manager, Employability Provider)

"It's been incredibly challenging because the amounts that we have been able to secure are smaller amounts and have only been for shorter timescales, so they have all been for a year so we're now back on the hamster wheel for looking for that again" (Manager, Learning Provider)

3.48 In addition several organisations had noted that services they were providing were being re-tendered but at a lower cost.

Commissioning Models

3.49 The dominant model for commissioning third sector providers to deliver public services has been the use of competitive tendering by local authorities and other contract awarding bodies. In many cases this model of tendering for new services had created a competitive marketplace in which third sector organisations competed with one another, and in some cases the private sector, to win contracts for the delivery of public services.

3.50 In Year 3 some interviewees were concerned that tendering did not encourage creativity in the design and development of services. Tendering was seen to hamper creativity, as third sector organisations could not feed into service design. In Year 1 there was a common perception that contracting decisions were based disproportionately on cost rather than quality and this was a trend that some felt was becoming increasingly so over years 2 and 3. In Year 4, one participant stated that they felt that "there seems to be a trend in the tendering of services specifically for that purpose of reigning costs down" (Senior Manager, Health and Social Care Provider). This was reiterated by others who experienced services that they had previously provided being re-tendered at a reduced cost. After tendering, there was limited feedback from some (but not all) funders and commissioners. For example:

"[we] didn't get any feedback on who else was funded, why it had been done that way, what the overall picture was, who the other providers were. It feels like a one way process" (Senior Manager, Employability Provider)

3.51 In order to facilitate the greater involvement of third sector organisations in service design, the Public Social Partnerships (PSP) model has been developed in recent years (Scottish Government, 2011b). In Year 3 some third sector organisations noted some potential trends which may result in increased involvement in service design, although increased tendering for contracts limited opportunities. One of the focus groups' participants in Year 3 had been involved with a pilot PSP. However, with this exception, organisations' experience of PSPs remained limited. In Year 4 experience of them remained limited across all the participating organisations, although more organisations had been involved.

3.52 In Year 3, it was noted that the sense of being in competition with other third sector organisations had increased in the period because funding cuts and increased tendering created a more competitive environment. There was some evidence to suggest that this competitive marketplace had undermined opportunities for partnership between third sector organisations and with local authorities. This trend continued in Year 4. For example:

"I think there is a slight element of greater competition and that's coming from the third sector having less money and when it is competitive tendering some organisations are broadening the scope of things they will bid for" (Senior Manager, Employability Provider)

3.53 By Year 3, some third sector organisations had concerns that some large contracts were made up by pulling together several existing funding streams into one and reducing the overall budget, although the same level of service had to be maintained. In contrast some third sector organisations perceived a decrease in tendering, with one large national third sector organisation care provider noting the decline in the number of large tenders for care work being issued by local authorities. These trends continued in Year 4 for some organisations.

3.54 A theme emerging from interviews with third sector organisations in Year 4 was the use of re-tendering by local authorities for services already being provided by third sector organisations. Re-tendering was understood by third sector organisations to be both a cost saving exercise but also a way of preparing the ground for the introduction of Self-directed support (SDS). A participant described the volume of re-tendering as "unprecedented, there's never been such a weight of tenders coming through all at the end of the last year" (Senior Manager, Health and Social Care Provider). This surge in re-tendering meant that the funding strategies that organisations were taking changed, as they now needed to focus on re-tenders rather than looking for new funding opportunities. A participant noted:

"We have had to focus on the re-tender of existing business and retaining that I suppose, as opposed to chasing the newer opportunities that are advertised through public contracts" (Manager, Health and Social Care Provider)

3.55 These re-tenders were perceived to be part of an exercise by several local authorities to reduce care costs by reducing the hourly cost of care. The participants also felt that a further driver for the re-tendering that took place towards the end of 2012 was a decision by some local authorities to prepare the ground for the introduction of personalised care budgets. Re-tendering was perceived by some third sector organisations as a mechanism by which an hourly rate for the cost of purchasing care could be established. This hourly rate would then be used to identify a cost for SDS budget holders to purchase their own care. For example:

"Local authorities have put their house in order by doing these retendering exercises, reducing the hourly rate and [local authority] was a fantastic example of that. [local authority] didn't just say could you tender, they told us what the price was …we would not be able to go to [local authority] and have a chat because they would say 'oh as long as you're on the framework, as long as your quality is good we will make sure that people know you exist. So you don't need to build a relationship with us, start going out and thinking about your marketing strategy" (Senior Manager, Health and Social Care Provider)

3.56 As mentioned above in relation to the experiences of the new Third Sector Early Intervention Fund, the issue of funders and commissioners not meeting their own schedules for announcing the outcomes of tenders and applications was becoming an issue in Year 4 also.

3.57 A general trend perceived by some participants was a move towards favouring larger organisations (sometimes due to economies of scales), although this created difficulties for small organisations and might limit local provision. For example:

"So the whole model isn't designed for small third sector organisations and maybe that's deliberate and maybe that's how policy is going and if that is the case all good and well but there will be a fallout from it at local level" (Senior Manager, Employability Provider)

3.58 In addition, several respondents perceived that funders and commissioners did not fully recognise the problems of cash flow for, especially smaller, third sector organisations, as follows:

"The reality is there is a very public sector attitude; which is the budget will come when it comes, because they don't realise the reality of cash flow" (Senior Manager, Employability Provider)

3.59 However, some felt that while the sector was undergoing rationalisation, larger organisations might not be advantaged. For example:

"I think we are seeing that rationalisation of the third sector, and whether that is because of people's capacity or pragmatism or whatever, I think it is a very competitive environment and it will be, I suppose, in some ways the survival of the fittest or the one that can actually cash flow or whatever. But that's no assumption that the bigger ones will survive any better than the small ones" (Senior Manager, Learning Provider)

New Funding Opportunities and Diversifying the Funding Base

3.60 Despite the challenges faced by standstill funding or funding cuts, many third sector organisations also felt that new opportunities for funding were emerging. A number of third sector organisations had secured significant new funding in Years 2 to 4, including picking up contracts where previous providers were no longer able to deliver the service. It is unclear as to whether there is a move from services previously provided by the public sector to third sector organisations (or private organisations), which could mean an increase in opportunities for third sector organisations.

3.62 In Year 1 many organisations were considering how they might move forward to best meet the challenges presented by the current policy and funding environments. By Year 2 more organisations were talking about diversifying their funding base to become less reliant on public funding. In Year 3, organisations continued to look at ways to diversify their funding base and a number were also looking at developing new activities, including increasing fundraising and additional commercial activity.

3.63 Many organisations operated some form of commercial activity. However, as highlighted in the Year 1 to 3 reports, this was not just about the establishment of 'social enterprises' as organisational forms, but rather the adoption of a range of managerial activities (such as marketing, business planning, strategic positioning, etc.). Specifically, in Year 1 there had been some discussion about the pros and cons of social enterprise activity whilst in the subsequent three years most of the participants admitted to exploring a range of approaches to a more business-like approach to their mission-critical activity. However, such an approach was not universal.

3.64 In Years 2 and 3, a small number of organisations explicitly mentioned pursuing strategies to increase fundraising within their organisation. These included increasing the amount from private donations and legacies, and encouraging members of the organisations (including volunteers and clients) to engage in more fundraising activities on behalf of the organisation. In Year 4 a small number of organisations explicitly mentioned the importance of fundraising to them, for example, to pay for campaign teams and to cover the shortfalls in services that funders and commissioners did not meet.

3.65 In Year 2, many third sector organisations had not considered applying for private loan finance. There were a number of issues limiting the ability of third sector organisations to access private loan finance e.g. limited assets, security and private income. Only one large third sector organisation had successfully accessed private finance. In Years 3 and 4, few organisations had accessed commercial loan finance. However, a number of organisations were seeking capital investment to develop various activities within their organisations, or were considering accessing commercial loan finance in the future.

3.66 Participants commented on what seemed like the preference of funders and commissioners to provide funding for new projects rather than continuing funding for older projects. Some participants identified that a major problem with new funding becoming available is that older projects may be stopped as a result, with a loss of efficiency, effectiveness and innovation. This is also linked to the difficulty of getting core funding, as discussed above, as funders and commissioners prefer new projects to long established ones or funding the core functions competences of organisations. For example:

"One of my big bug bears is you will see a new funding stream come on…but when you look at the small print it must be for new projects. Why? Please justify that for me. Because what you find is that a project is new, through a period of time it will struggle to get referrals, it will make disastrous mistakes, it will learn from that quite quickly. By the second or third year the project is into its stride now…and suddenly you find its six months or a year left and staff are demoralised and are looking elsewhere, end of story…It's at that point where it has just found its feet that you want to sustain it because lots of new innovative practices come from that, that's getting lost" (Senior Manager, Learning Provider)

Performance and Outcome Measures

3.67 This section examines issues for third sector organisations around performance and outcome measurement. This includes the trends experienced by third sector organisations in measuring outcomes, and the strategies used by third sector organisations to meet the needs of funders and commissioners in terms of performance and outcome measures.

Trends in Measuring Outcomes

3.68 In Year 1, many third sector organisations felt funders and commissioners had focused on measuring 'hard' outcomes (such as entry into a job) at the expense of 'soft' outcomes (e.g. improved confidence). By Year 2, a number of third sector organisations felt that funders and commissioners had become more focused on measuring outcomes^[8] within the previous year. By this they meant that the client's journey through the programme rather than outputs^[9] (such as a client undertaking a development training programme) was becoming important. This generally continued into Year 3, although some also felt a more 'bureaucratic' approach was being taken by some agencies, in particularly by the Care Inspectorate and the European Social Fund. However, 'measuring outcomes was also linked to a wider professionalization of staff and operations. For example:

"By professionalising and doing all these things we can evidence to others that we are delivering real quality to a standard and we do what it says on the biscuit tin" (Senior Manager, Employability Provider)

3.69 It was felt by some that local authorities were not under the same pressure to evidence results and this might lead to some services being retained in local authorities that might be better provided by the third sector. A participant noted:

"Typically we will have to evidence…but internal departments in local authorities simply don't evidence" (Senior Manager, Employability Provider)

3.70 In Year 4, participants were asked as to whether they had noticed any changes in the trends in measuring outcomes in the previous 12 months. For some there had been no change, just a continuation, and in some instances an intensification, of previous trends: for example, a focus on outcomes rather than outputs and increased compliance and scrutiny. However, one participant felt that there was a focus on targets, and that in addition more attention needed to be put on the processes that led to the achievement of outcomes, as follows:

"I think people are becoming very target orientated. I don't think that's a bad thing in its entirety, I think it becomes a bad thing when people think that's the sum of what you do. They don't take into account the processes that you go through to achieve that" (Senior Manager, Employability Provider)

3.71 Those participants who mentioned Social Return on Investment (SROI), found it not to be very relevant as few had engaged with it, and those who had explored using it had decided not to pursue it after some investigation. For example:

"Social return on investment we haven't, that was kind of looked at but we didn't pursue it" (Manager, Health and Social Care Provider)

"It's complex. I have been on a 2 day course for it but it leaves you even more wondering how on earth you would put that into your organisation" (Senior Manager, Employability Provider)

3.72 For those who identified changes in measuring outcomes, a distinction between external and internal changes needs to be made. For one organisation a local authority had rolled out a new system for measuring outcomes. This third sector organisation had to get to grips with this detailed new system, although having previously been used to the reporting requirements of European funding this was not as 'frightening' as it was perceived to be for other organisations. The local authority had also adapted the system to take account of 'soft' outcomes when third sector organisations had argued that these were not being captured. The feeling that funders and commissioners were asking third sector organisations to measure the 'wrong' things was reiterated by another participant.

3.73 Internal changes being made by some of the third sector organisations (note that it was not always clear whether these changes had only occurred in Year 4, or whether they were starting to be put in place earlier) included:

• investing, adapting and modernising back office systems and evaluation tools;
• logic modelling to identify how outcomes achieved match with outcome agreements, Scottish National Outcomes and funders and commissioners' outcomes;
• development of new databases to capture outcomes and indicators;
• simplifying monitoring systems so the data gathered could be used more effectively;
• commissioning evaluations;
• recruiting staff to deal with contracts and monitoring officer.

The Needs of Funders and Commissioners

3.74 The Year 1 report noted funders and commissioners required third sector organisations to report performance and outcomes in different formats and use different measures, leading to multiple measurement devices being employed. However, by Years 2 and 3 some third sector organisations had introduced some standardisation to internal measurement tools for example. However, third sector organisations also reported in Year 3 the challenges presented by inflexible measurement tools. A key change with regard to measures of organisational performance in Year 3 for several health and social care third sector organisations had been a shift to measuring customer attitudes with a reduced focus on internal performance indicators. In Years 1 to 3 some third sector organisations also reported providing additional evidence to funders and commissioners on the impact of the service on the client over and above what was formally required. Third sector organisations who provided this evidence believed that funders and commissioners welcomed this additional information because it showed the added value they were getting from the third sector organisation.

3.75 In Year 4 the theme of inconsistency in funders and commissioners' requirements regarding reporting performance and outcomes continued. Some were seen to take a light touch approach whereas others required vast amounts of data from third sector organisations. Some third sector organisations felt that funders and commissioners were not always clear themselves what information they required, which made reporting difficult, or were so focused on minute details that the bigger picture got lost. For example:

"Some are very light touch and it might just be an annual report, but others would request vast data and narrative quarterly. Local authorities have all got slightly different monitoring systems… So there is no coherence…" (Senior Manager, Health and Social Care Provider)

3.76 This was especially a problem for third sector organisations that were funded by numerous funding streams and therefore having to work with different reporting mechanisms and systems. One participant also highlighted that it was also relevant to application processes as tender documents were asking for the same information but in slightly different ways, as follows:

"…all the funders are asking different questions in the monitoring forms and application forms. And it's really all around the same common themes…Now what you have is hundreds of different ways of saying that, needless questions that repeat themselves" (Senior Manager, Learning Provider)

3.77 Some organisations had tried to directly engage with funders and commissioners to develop universal monitoring forms for example to ease the problems, or by developing systems internally that made it easier to use the same datasets to report to a number of different funding requirements and criteria.