The Opportunities and Challenges of the Changing Public Services Landscape for the Third Sector in Scotland: A Longitudinal Study: Year Two Report

2 CHANGES TO THE POLICY AND FUNDING ENVIRONMENT

Chapter Summary

This chapter outlines the key changes to the policy and funding environment during 2010 and early 2011 that were relevant to TSOs in Scotland. The impact of these on the organisations, their clients and staff is also explored.

Changes to the policy environment

As well as cuts to public sector funding, other key changes in the policy environment at UK Government and Scottish Government level included:

The introduction of the Work Programme across the UK replaced existing employability streams with a significantly different method for contracting services. This had the potential to have a major impact on TSOs who provided employability services in Scotland, although at the time of the research the outcome was not yet clear

The Welfare Reform Bill in the UK had started to have adverse effects on some TSOs and their clients, particularly those working with single parents, carers and people with disability.

Personalisation (or self-directed support) in Scotland was becoming increasingly important on the agenda of TSOs providing services in health and social care. Most were supportive of the principle of devolving power to service users with a number of TSOs already keen to develop personalisation for their own services.

The shifting nature of policy priorities presented on-going challenges and opportunities for TSOs. The perceived low priority of volunteering in policy was an issue for some TSOs who relied on a volunteer base, while it was not entirely clear how the 'Big Society' agenda would impact in Scotland. The context of ever-tightening resources meant regulation had become increasingly burdensome for some. Variations in policy priorities between local authorities remained an on-going issue.

Changes to the funding environment

Increasingly, tendering was the main method by which funding was contracted. However, there were variations in approaches between local authorities and no standardised approach on which services should formally go out to tender. There were tentative indications that some local authorities might be moving towards allowing more input from TSOs into service delivery plans. There was also an on-going concern around the emphasis on cost rather than quality in funding decisions.

Most of the spending cuts were expected from April 2011 and therefore after most of the year two fieldwork had taken place (Jan-March 2011). However, prior to this date actual cuts had been relatively limited. However, funders had attempted to save money prior to April 2011 through standstill funding, cutting and changing conditions to existing contracts and re-appropriating underspends.

Despite anticipated cuts, many TSOs felt that new opportunities might emerge through more contracting out by local authorities, new policy priorities as well as gaps created by other TSOs closing down.

Many TSOs had not considered applying for private loan finance because they had limited assets, security and private incomes, although a small number had been able to successfully access this source of income in order to invest in property.

Impact of policy and funding changes

Only a small number of TSOs noted any significant changes in demand for their services, with some reporting lower numbers of referrals (due to changes in statutory services identification of clients) and others reporting increased demand due to other agencies closing down.

The impact on service provision had been minimal despite funding being (at best) at a standstill and (at worst) a 15% cut. While some TSOs had had to make reductions in some services because of cuts, most had avoided this by absorbing the effects through making costs savings elsewhere or using accumulated underspends from previous years. However, the latter in particular, was not a strategy that was sustainable into the next financial year.

TSOs were keen to minimise the impact of cuts or standstill funding on clients, although choice and flexibility for clients was threatened, in particular the provision of more expensive outreach services.

The impact of the policy and funding changes had been felt most acutely by staff within TSOs. There had been redundancies, reduced hours, changes to terms and conditions of staff contracts as well as increased workloads. This had created a general atmosphere of uncertainty and anxiety among many staff in TSOs, in some cases having a negative impact on staff morale.

Introduction

2.1 The Year One report outlined the policy background and context within which TSOs in Scotland operated at that time. Many of these remain relevant in Year Two. Some of the key factors highlighted in the Year One report included:

• The Scottish Government's commitment to promoting high quality public services and the importance of the third sector in on-going public service reform.
• The 2007 Concordat between the Scottish Government and local government which reduced ring-fencing and devolved control of some budgets to local authorities (LAs) and Community Planning Partnerships (CPPs). This fundamentally changed the relationship between national and local government in Scotland. This aimed to promote the alignment of funding and activities within local authorities and other areas of the public sector with the Scottish Government's priorities and national outcomes. Key tenets of the Concordat were:

• Collaborative working and joint accountability - the relationship between central and local government to be based on mutual respect and partnership to enable local authorities to respond more effectively to local needs by reduced micro-management;
• Reduced bureaucracy - reduction in the number of funding streams and monitoring and reporting to central government and a more focused and proportionate inspection scheme;
• Single Outcome Agreements (SOAs) - to be established between central government and each of the 32 local authorities with the aim of aligning policy with overall government targets, taking account of local priorities. From 2009-10 Single Outcome Agreements (SOAs) were to be agreed with Community Planning Partnerships rather than local authorities.

• A major programme of change in third sector infrastructure with the announcement in March 2008 that as of April 2011 the Scottish Government would no longer fund networks of Councils of Voluntary Service (CVSs), volunteer centres, local social economy partnerships and social enterprise networks in their current form. This led to the development of new third sector "interfaces" in each community planning area in Scotland which typically involve the networks listed above. The interface is the means by which the third sector is represented on the CPP.
• The Enterprising Third Sector Action Plan (2008-2011) which aimed to support enterprising behaviour in the third sector, including the Scottish Investment Fund (£30M) and the Enterprise Fund (£12M).
• The public-social partnership (PSPs) model involving the public sector and the third sector working in partnership to design and deliver public services which was piloted from 2009.
• The Social Return on Investment model (SROI) as a means of measuring how TSOs deliver social and environmental benefits
• The Third Sector Task Group created in 2008 for a fixed term with a specific remit to improve coordination of third sector organisations in Scotland, local authorities and the Scottish Government. The main output from the Task Group was the "Joint Statement" on the Relationship at Local Level between Government and Third Sector signed by Scottish Government, COSLA, Local Government and the third sector and offering recommendations on working relationships in relation to funding, shared services, Best Value, application processes for grant funding, strategic commissioning and procurement, re-tendering, European Procurement Law, monitoring, reporting and evaluation and partnership.
• The economic downturn and the current and future budget constraints and their potential impact on the third sector in Scotland.

2.2 In addition, since the fieldwork was carried out for the Year One report (December 2009-May 2010), there have been a number of key events in the UK policy environment. These include the formation of the Conservative-Liberal Democratic Coalition Government in May 2010. There have been a number of emerging relevant policies as a result including the introduction of the Work Programme which replaced existing employability funding streams and the Welfare Reform Bill (February 2011). These will be explored in depth in relation to their impact on TSOs later in the report (See 2.12-2.22).

2.3 On-going is the UK Government policy of deficit reduction resulting in spending cuts within the public sector. This has resulted in a reduction of the Scottish Budget in 2011-12 of £1.3 billion compared with the previous year which will translate into spending reductions of over 11 per cent in real terms between 2010-11 and 2014-15⁹ .

2.4 The SNP minority-led Government set up the Commission on the Future Delivery of Public Services (Chaired by Dr Campbell Christie) in November 2010 in order to "examine how Scotland's public services can be delivered in the future to secure improved outcomes for communities across the country", despite the challenging financial environment. The Commission reported in June 2011¹⁰ and identified the following key priorities:

• Recognising that effective services must be designed with and for people and communities, not delivered 'top down' for administrative convenience
• Maximising scarce resources by utilising all available resources from the public, private and third sectors, individuals, groups and communities
• Working closely with individuals and communities to understand their needs, maximise talents and resources, support self reliance and build resilience
• Concentrating the efforts of all services on delivering integrated services that deliver results
• Prioritising preventative measures to reduce demand and lessen inequalities
• Identifying and targeting the underlying causes of inter-generational deprivation and low aspiration
• Tightening oversight and accountability of public services, introducing consistent data-gathering and performance comparators to improve services
• Driving continuing reform across all public services based on outcomes, improved performance and cost reduction
• Implementing better long-term strategic planning, including greater transparency around major budget decisions like universal entitlements.¹¹

2.5 As the Christie Commission reported after the Year Two research was completed, it was too soon to gauge the implications of the report for the TSOs.

2.6 In addition, the Scottish elections took place in May 2011. Although the outcome was unknown when much of the fieldwork was carried out, this formed a significant backdrop for many of the TSOs. Along with many of the policies discussed in the Year One report, personalisation had moved up the agenda for a number of organisations by Year Two (and since the SNP formed a majority government in Scotland from May 2011 will continue to do so). Again, this is discussed in more detail later in the report (see 2.23-2.32).

2.7 Table 1 below presents a timeline of key policy events which have the potential to impact on TSOs in Scotland. These are set against the fieldwork timetable to highlight the timeframe within which these might have an impact. However, there is likely to be a time lag in many instances between policy announcements and impacts filtering through to TSOs and it is overly simplistic to assume a direct causal relationship between a policy event and change in the third sector (the attribution problem). The timeline is intended to set out a broader political context within which the study took place.

Table 1: Policy and fieldwork timeline

Changes to the policy environment

2.8 Between Years 1 and 2 significant changes in the policy environment occurred: firstly, the election of the UK Coalition government in May 2010 and the various new policies emerging from this new government; secondly, the Scottish elections in 2011. Although most of the field work was carried out prior to the elections, they formed an important part of the changing context for many organisations.

2.9 The Year One report outlined issues relating to current policy, particularly in Scotland, at that time. These included issues relating to the Concordat, including the 'localism' agenda and community planning partnerships. The long-term general UK and Scotland trend towards increased focus on employability at that time was also noted. While the issues raised in the first year remained on-going, subsequent years aimed to explore key changes to the policy environment that took place in the intervening period and the impact these had on third sector organisations. Key policies emerged at different levels, in particular from the UK government level and the Scottish Government level, but also policy via the local authority level.

2.10 Broadly, UK government policy was more relevant to TSOs focusing on employability (as a non-devolved issue), while for TSOs specialising in health and social care, policy at the Scottish Government level was more pertinent. However, there was often overlap in the activities of TSOs, and policy at different levels affected most TSOs to some extent.

2.11 This section begins with an overview of the impact of policy changes in terms of creating increased change and uncertainty for TSOs. This is followed by a closer examination of key UK government policy in terms of the Work Programme and the Welfare Reform Bill. At the Scottish Government level, this section examines key policies of personalisation and other policy priorities. There is then a brief overview of some issues raised by TSOs in relation to regulation, followed by an overview of policy at local authority level.

UK Government policy

The Work Programme

2.12 A key change for a number of participants, particularly those involved in the delivery of employability services, related to the change at Westminster. In particular, the introduction of the Work Programme which replaced existing employability funding streams¹² .

2.13 The programme aims to get long-term unemployed people back to work with the use of third-party suppliers. The programme will select a small number of 'prime contractors' to deliver services in specific regions across the UK. The prime contractors need to have substantial resources in order to operate the programme. This is because the programme is based on payment by results (e.g. a client gaining and/or keeping a job), so the majority of payments to providers would only be made, for instance, after a person previously on benefits starts work. The prime contractors are then expected to sub contract specific areas of work to other organisations. Hence, these organisations are likely to be smaller specialists. In consequence, many partnership networks around possible prime contractors had been and were being established.

2.14 At the time of much of the Year Two fieldwork, the outcomes of the Work Programme bidding process were unknown since funding allocations were not announced until April 2011. Some TSOs felt the Work programme offered significant opportunities for new areas of funding. However, the programme also required significant adaptations (in terms of partnerships required, tendering processes, measuring outcomes and potentially service delivery) from the third sector organisations involved, particularly those used to contracting under the pre-existing employability funding streams. Funding through the Work Programme could only be accessed by a relatively small number of very large organisations and this had created the need to develop both new and existing partnerships in order to tender for the contracts. Some felt that this had been particularly time-consuming and there was also a lot of uncertainty among the TSOs who were hoping to get funding from the Work Programme:

The whole process [contracting via the Work programme] has been really drawn out and incredibly complex because of the numbers of potential primes you are dealing with and I sincerely hope that the DWP don't do further tenders in this way.

Senior Manager, Local Employability Provider

2.15 Since it was uncertain which organisations would succeed in their bids to become the 'prime' e.g. main contractors, there was a potential need for TSOs to try and link with as many of the potential prime contractors as possible in order to have an opportunity to continue to deliver employability services. Some also felt that it was unclear how much of the budgets would be passed down to smaller sub-contractors from the main contractors.

2.16 When the results were announced in April 2011, the two prime contractors in Scotland selected were both private sector organisations and there was some concern expressed by those interviewed after that date that the third sector had been sidelined; a sentiment echoed by the Labour party and others in Scotland¹³ . One participating TSO who took part in the research shortly after the announcement of the work programme results was disappointed to have been unsuccessful in bidding for a major contract. This resulted in the loss of significant funding for them in the short-term although there was potential to pick up some funding as a sub-contractor at a later stage.

2.17 There was also some concern as to how the new payments-by-outcomes would operate in practice and how it would affect the cash flow in smaller sub-contractors. There would also be a transition period between March and June 2011 for some TSOs where existing employability contracts ended and before Work Programme funding started creating uncertainties for staffing.

2.18 In summary, there was a great deal of uncertainty among TSOs around the Work programme. For some it presented potential opportunities for new funding, but for others the concerns included: who would be successful in contracting or sub-contracting to deliver services; for those that were involved, how the programme would work in practice; for those who were unsuccessful, how they would fill the funding gap.

Welfare Reform Bill

2.19 There were also changes to policy related to the UK Spending Review, and later the Welfare Reform Bill (February 2011), such as changes to benefits for lone parents and disabled people and changes to housing subsidy. The reforms include, amongst other things¹⁴ :

• the introduction of the Personal Independence Payment to replace the existing Disability Living Allowance which requires existing claimants to be reassessed for the benefit
• restricting Housing Benefit entitlement for social housing tenants whose accommodation is larger than they need
• caps on the total amount of benefit that can be claimed
• the introduction of Universal Credit to replace different and separate existing benefits, such as employment support and housing benefit
• changes to the child support system.

2.20 The impacts of these policies had started to filter through to TSOs by Year Two. One TSO had started to experience lower income because of the caps on housing benefits. However, the impacts were mostly around the client groups. In particular, TSOs mentioned the impacts on single parents, carers and people with disabilities. For instance, they reported that some clients had experienced loss of confidence and increased anxiety, as well as being distracted from their activities with the TSOs:

Their anxieties are around this area [reviews for disability benefits] so we spend a lot of time focusing in on that rather than the actual job in hand which is getting people into employment.

Senior Manager, Local Employability Provider

2.21 There was some concern that this had resulted in less specialist and more generic help being available to clients by large employability providers and those processing Job Seekers Allowance (JSA), i.e. TSOs were not individualising the support provided to specific clients and their needs, but treating them all in the same way.

2.22 In addition, there was concern that the UK policy emphasis on protecting 'front-line' services would lead to preventative services being perceived as a luxury, and would suffer cutbacks as a result.

Scottish Government policy

Personalisation

2.23 Personalisation (also called 'self-directed support) has become increasingly important in the UK and Scottish policy agendas. This gives adults with special needs direct control of designing their own services by sharing with them, or giving them, responsibility for the funding of their services. There is an unresolved debate about whether this is a model that empowers individuals by giving them direct control over the finances of their services or disempowers them by disaggregating and isolating individual service users. Although 'direct payments'¹⁵ have been around for over a decade¹⁶ , the development of personal budgets is more recent and was given a boost with the Convention on the Rights of Persons with Disabilities which came into force in 2008¹⁷ . In Scotland, The Changing Lives report considered the role of social work in supporting this change, not just for disabled people, but for all who require care and support¹⁸ . A consultation on self-directed support in Scotland in February 2010 was followed by a draft bill in December 2010¹⁹ .

2.24 The Scottish Government defines Self-directed support (SDS) as

The support individuals and families have after making an informed choice on how their Individual Budget is used to meet the outcomes they have agreed²⁰ .

2.25 The same report states that 'SDS is often described as the personalisation of social and health care' (page 9). We use the term 'personalisation' in this report since that this how most of the respondents referred to it.

2.26 For TSOs working in health and social care, personalisation is increasingly important to the way in which their services are likely to be delivered in the future. This was mentioned by some in Year One, but it was in Year Two that it really came to prominence, with a number of Scottish Government consultations coming out during 2010 (see Table 1, Policy and fieldwork timetable, page 26).

2.27 Personalisation was an agenda that had been particularly supported and promoted as policy by the SNP. Since most of the Year Two research was carried out prior to the Scottish Elections in May 2011, some TSOs were not sure what priority personalisation would have in the future if a non-SNP government was elected. However, many had already been preparing for personalisation and look set to continue to do so especially in the light of the SNP returning to power in May 2011.

2.28 Many of those who discussed personalisation were supportive of devolving power to service users. One was actively involved in promoting personalisation, while another was focused on person-centred care and personalisation supported that agenda. These and others had been preparing for personalised and self-directed support for some time. However, others were anticipating the potential implementation to be more of a challenge. Issues raised by TSOs regarding the implementation of self-directed care budgets included:

• the challenges of moving from institutional care provision to personalised care;
• the potential for greater complexity in the management of staff rotas and payments for the provision of services;
• adapting to the different way of funding presented by personalisation may require major changes to the way some organisations currently operated, although the exact nature of these was sometimes uncertain.

2.29 Similar issues emerged in a discussion of the personalisation agenda which took place at the Workshop held in June 2011. On the one hand, this was described as having great potential to deliver excellent services through increased tailoring to individual needs, but conversely a challenge to organisations with little existing expertise in the area in order to be able to deliver personalised services. It was suggested that this theme was particularly important to some areas (e.g. Mental Health, Social Care where personalisation was being focused) but not across all TSOs.

2.30 Some TSOs felt that personalisation had the capacity to change the way care was conceived, allowing more people to be supported in the community rather than in institutions (e.g. independent living) and care tailored to specific needs. However, some 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 services²¹ . As a result they were concerned that less finance would be available to clients:

This is a Scottish Government policy which has the best of intentions but in a changing environment is being used in some situations in a negative way, to cut budgets…Personalisation has, as a policy, the capacity to make significant improvements in service delivery and be the catalyst for positive change but the policy is being used to fast track change in a way that is having a negative influence on those who use services and those who deliver them….Having choice is great but it is limited by the resources that are available financially.

Senior Manager, Health and Social Care Focus Group

2.31 TSOs also pointed out that there were disparities across local authorities in the conceptualization and implementation of personalised social care leading to uncertainty and potentially variable access between clients living in different areas:

In [one local authority area] personalisation appears to...be being implemented on the basis of cutting costs rather than on the basis of actually personalising services…in other places it has been done more with a view to trying to personalise services and in other places, they are just not doing it at all…It's been a bit uncertain because there hasn't been a uniform approach to it.

Senior Manager, National Health and Social Care Provider

2.32 Some TSOs thought that because personalisation was being introduced as a cost-cutting exercise by some local authorities (or was perceived to be), this had resulted in less enthusiasm and less support within some of the third sector to implement the agenda:

Local authorities have approached [the personalisation agenda] with a specific mindset, as a cost-cutting exercise, so people [e.g. TSO's] have not trusted it rather than grabbing it with both hands and running with it.

Senior Manager, Health and Social Care Focus Group

Other policy priorities

2.33 There was a wide range of Scottish Government policies that impacted on the TSOs who participated in this study, although these were often specific to the area within which a TSO worked. More generally, points were made about shifting policy priorities and the run up to the Scottish elections.

2.34 The Year One report noted that there had been general policy shifts towards employability on the principle that work offered individuals positive outcomes. The Year One report also noted that there had been a shift to the provision of support for specific demographic and social client groups, such as older and younger people, people with addictions and BME communities. This move reflected the targeting of funding on specific groups. 2010/2011 were perceived to be years of particular change both at Scottish Government, UK Government and local authority level. Shifts in policy could favour some organisations to the detriment of others. For instance, one organisation perceived that the greater emphasis within policy on early years could have a detrimental impact on their work with teenagers and young adults, whilst for another, the policy focus on sexual health had resulted in greater resources for their work. This raised issues for organisations about the extent to which they adapted their work to fit with changing policy priorities. Given the current period of particular change, this was prominent in the minds of many and is explored further in the next chapter; see particularly 'Responding to funding opportunities and the potential for 'strategic drift', 3.3-3.7.

Volunteering

2.35 Another key policy area for some TSOs was that of volunteering, though it was by no means universal. For some TSOs volunteers were at the core of their organisational philosophy whilst for others they were a distraction from professionalised service delivery. Volunteering was also perceived to be low on the Scottish Government agenda. This dichotomy was reflected in the Project Workshop for study participants in June 2011. Some third sector attendees felt that there was a lack of focus on volunteers in the study, despite this being a core aspect of TSOs, whilst others felt it was a minor issue that distracted from the main concerns of the sector. The paradox between the expressed 'added value' of volunteers to the work of TSOs and the pressures towards professionalization of public service delivery by TSOs were highlighted. Volunteers in TSOs (for whom volunteers were a significant element of their organisation) were described as having high expectations of what they might gain from a TSO (e.g. experience, training, qualifications) but were not necessarily a reliable element of service delivery. Accountability processes at the local authority level were also highlighted as excluding volunteers from certain positions which required the guarantee of paid positions for health and safety/insurance purposes.

2.36 Prime Minister David Cameron's 'Big Society' agenda was not raised as a model that had especial resonance for Scotland. There was little dissent from the aspirations of the agenda, though some did object to what they saw as the co-option of these ideas by the Conservative Party led UK Coalition government for their own ends. Further, many TSOs also felt either that the mechanisms outlined for the achievement of the 'Big Society' were, at best counter-productive and contradictory (such as arguing for an increase in third sector involvement in public services delivery whilst at the same time cutting funding to that sector) or that they were primarily an English policy and had little resonance with public policy in Scotland and the needs of Scottish communities²² . However, one organisation did think that the 'Big Society' agenda meant a recognition of the value of the ethos and philosophy of the third sector.

Regulation

2.37 TSOs are required to comply with a raft of regulations and monitoring requirements, some of which vary depending on the nature of the work with which they engage. These include, for instance:

• Regulation, e.g. Care Commission regulation for those dealing with children, Scottish Social Services Council regulation for those providing social care;
• Legislation, e.g. Health and Safety Compliance, Equalities and employment legislation;
• Monitoring and compliance, e.g. related to funding requirements (See section on Performance and Outcome Measures, Chapter 4).

2.38 However, in the context of ever-tightening resources these exercises could become increasingly onerous, particularly for small organisations. A couple of TSOs noted that increasing regulation required additional resources that were not provided for by funders.

2.39 In one case, the social care practitioners within one TSO were required to register with the Scottish Social Services Council (SSSC). As a smaller community-based organisation in particular, this was a challenge. The cost of the staff training for SSSC registration was not covered by funders who are not bound to assist in the up-skilling of the social care workforce. Another TSO attributed this situation to the separation of regulation and funding:

While the aim of the government was to improve standards, the fact that regulation and funding were devised independently led TSOs funders not to take on board the financing of training staff.

Senior Manager, Health and Social Care Focus Group

Local authorities

2.40 The Year One report noted variations between local authorities in policy priorities. Earlier in the report, we reported that local authorities were perceived to be inconsistent in their approaches to personalisation. Variations in approaches between different local authorities continued to be a challenge for some TSOs, particularly those working across several different areas. Some of these challenges will be noted later in the report.

Changes to the funding environment

2.41 This section looks at key changes to the funding environment that occurred between Years One and Two. One of the key policies of the UK Coalition Government has been reducing the UK deficit of which reductions in spending on public services has been a key component. This section examines the extent to which TSOs in Scotland have experienced funding cuts within the last year.

2.42 This section also examines trends experienced in tendering as well as some of the new opportunities that may be opening up in the changing environments. Finally, this section examines perceptions and access to private finance for TSOs.

Tendering

2.43 The Year One report identified tendering as an important issue for many TSOs because increasingly this was the main way in which funding was decided. For many TSOs the era of grant funding from government was a historical one, largely being replaced by tendering for public services either on a negotiated or competitive basis. This was true across a range of funding sources including the EU funding, the UK Work Programme and Scottish Government and local authority funding in Scotland.

2.44 While tendering created opportunities for TSOs it also created challenges. For example, many TSOs noted different approaches to tendering in different local authorities, creating problems for TSOs that worked across a number of authorities. One participant also noted that a couple of smaller local authorities were limiting tendering because of the cost of the process during a time of local authority cuts whilst another pointed out that there was no standard on what services would formally go out to tender and local authorities operated different policies. A final participant also noted a change to the way in which their local authority was tendering. The local authority had asked the TSO to present a costed service delivery plan²³ . This participant felt this created opportunities for creativity but that the process 'takes time and takes energy' (Senior Manager, Local Employability Provider). She also felt that, at least in the employability field, this was a general trend in contracting.

2.45 In Year One there was a common perception that funding decisions were based disproportionately on cost rather than quality and this was a trend that some felt was becoming increasingly so. Several were particularly concerned about the impact of cuts on the quality of services, particularly since many felt quality was an integral part of the ethos of their organisations. Some perceived that cost savings would need to be achieved by making a choice between quantity and quality, e.g. reduce front line hours but keep service quality or keep the hours but compromise on quality by reducing level of staff training or tie-in services²⁴ .

2.46 One TSO also felt that there was an increasing lack of clarity about funding processes (e.g. the application processes for grants beyond 2011 had not been decided at that time).

2.47 However, some larger TSOs reported they were experiencing more opportunities to negotiate with funders around contracts. They had the capacity to potentially leverage in more funds (with more capital) and had more power in their relationships with local authorities. Some small TSOs, however, continued to feel that they had less bargaining power than some of the larger TSOs. Also see 'Relationships with local authorities' 5.23-5.26.

Funding cuts

2.48 In Year One many participants were anticipating public sector spending cuts over coming years creating uncertainty. However, at the same time potential opportunities were emerging, through new areas of funding opening up. By Year Two, many were anticipating the main spending cuts to come in April 2011 and therefore after most of the year two fieldwork had taken place Jan- March 2011). Prior to this date only some of the organisations had experienced actual cuts. However, participants reported other ways funders were attempting to save money before April 2011. For instance, as noted in the Year One report, funding continued to not cover the costs of inflation (standstill funding), cuts were made to existing contracts half-way through the contract period, underspends were re-appropriated by some local authorities and some funders had changed the terms of the funding agreements, so for instance, in one case this meant that only certain types of clients were now eligible to access the service.

2.49 Where actual cuts were known, they tended not to be as high as the 20% some had been anticipating in Year One. The maximum funding TSOs had received was standstill funding (e.g. no inflation costs covered), while others had received between 5% to 15% cuts. However, some were still expecting major cuts in the forthcoming year, in one case up to 40% and a number were in the process of renegotiating existing service provision with local authority funders in order to meet the funding cuts required by the funders.

New opportunities

2.50 Despite the challenges faced by standstill funding or funding cuts, many TSOs also felt that new opportunities for funding were emerging. A small number of TSOs had received significant new funding since Year One (funding sources included the Big Lottery Fund, via the NHS and another had picked up a contract where the existing provider was no longer able to deliver the service).

2.51 One respondent was anticipating that there would be more contracting out by local authorities (although as we found earlier this is likely to vary depending on individual local authority areas). Shifts in policy priorities at UK and Scottish Government level are likely to create opportunities in new policy areas. One participant noted that some local authorities were creating new funding at the same time they were cutting others. Others were anticipating new programmes of funding depending on the outcome of the Scottish elections. Another felt that the outcomes-based payments approach (such as in the Work Programme) created opportunities for additional work for their organisation. A number of participants noted that some funding opportunities were likely to open up as existing small TSOs closed down, creating a number of small pots of money. For instance, one participant noted that this had happened in his field several years ago, leaving a smaller number of medium-sized TSOs.

Loan finance

2.52 Many TSOs had not considered applying for private loan finance. Some thought they would not be eligible because they had limited assets, security and private income. There were a number of issues limiting the ability of TSOs to access private loan finance, particularly for smaller organisations; in particular, having suitable security and ability to pay the interest on a loan.

2.53 A small number had, however, received a loan through the Scottish Investment Fund. In one case this had gone towards the costs of the purchase of new premises.

2.54 A couple of TSOs had looked into (or were currently looking at) the possibility of private loan finance. In one case, the TSO had hoped to get a loan to buy the building they operated from since this would give them an asset as well as reducing long-term rental costs. However, they had not taken this any further due to uncertainties in their funding circumstances in the coming year. Another TSO owned their small head office premises and were considering options in relation to this asset, including whether to take out a loan to modernise the current space, or to rent part of it out. Also see 3.16-3.17.

2.55 One large TSO had successfully accessed private finance by going into partnership with another TSO. Because both organisations were in good financial order, together they were able to obtain a loan in order to purchase a new head office building which they shared together. This gave them an asset as well as reducing costs in rents.

2.56 One participant felt that high street banks (with a couple of exceptions) were generally not able to offer suitable services for the third sector:

When it comes down to it, they [high street banks] actually have a very very conventional traditional banking model and you're really not getting no concession that you wouldn't do if you were any other SME approaching them. I think however, having said that, there are enlightened banks out there, like Triodos and the Co-operative Bank who take a different approach because their motivation is different.

Senior Manager, Local Employability Provider

Impact of policy and funding changes

2.57 There was some concern among TSOs about the impact the current policy and funding situation in Scotland was having (or may have) on services, clients and staff. This section explores some of these issues including: changes in demand for services; impact on service provision; impact on clients and impact on staff within TSOs.

2.58 In Year One, many TSOs had experienced some impact from on-going standstill funding, including staff salaries being frozen. At that time, they were concerned with the implications of future potential funding cuts. Concerns included the impact on service quality, that some client groups might become marginalised and the loss of skills, knowledge and capacity within the sector.

Changes in demand for services

2.59 In terms of demand for services, only a small number of TSOs noted any significant changes. In a couple of cases, respondents said that some referral agencies were failing to identify specific client groups in order to refer them onto their organisations for specialist support. This was perceived to be because of changes to the way benefit claimants are categorised in relation to Job Seekers Allowance, making fewer eligible. This had meant Jobcentre Plus staff were focused on providing more generic or generalised support rather than providing specialist help to specific groups and so lacked the knowledge in order to refer clients on to other specialist organisations. For instance, this was mentioned in relation to people with disabilities, people with dependency issues as well as lone parents:

There are big providers in employability services who are apparently not even identifying if people are lone parents or not, so they are not getting specialist help.

Senior Manager, Equalities Focus Group

2.60 Other TSOs, however, had experienced an increase in demand for certain types of services, leading to one TSO creating a waiting list. In one case this was due to other agencies closing down and clients who would have been referred to these now being referred to the TSO. In addition, she noted that the clients who were being referred tended to have higher support needs than the clients they had served in the past, which created pressures for their services to meet additional needs they were not set up to meet:

[Projects] have identified that there have been a higher number of referrals going into [services] and the nature of the referrals is that they require more intensive support than has been the case before...that particular project is going to be reviewing it's criteria again...and having to say 'well actually, that's not appropriate for us'... not taking any clients and not being seen as I suppose a pseudo-social work service either, but being able to maintain the identity of the organisation and the project and it's integrity...That's been the experience in one particular local authority area.

Senior Manager, Equalities Focus Group

Impact on service provision

2.61 As noted above under 'Funding cuts' (2.48-2.49), the most positive outcome for all existing services was standstill funding, with others receiving up to 15% financial cuts. In some cases, this had led to reductions in the number of hours of a given service.

2.62 In one focus group, some TSOs indicated that they were able to negotiate the degree of cost savings to be achieved, either by reducing the quantity of care front-line hours while keeping the quality (which was not favoured by local authorities) or by keeping the quantity of front-line hours and reducing the quality (i.e. reducing tie-services or the level of training of staff). Reducing the quality of the service involved recruiting staff with lower levels of training and qualifications who could not provide the same standard of service as highly trained staff, for instance, or services being less tailored to individual clients relying instead on a generic support package.

2.63 In a number of cases TSOs had been able to maintain services by absorbing the effects of standstill funding or cuts by making other cost savings elsewhere in the organisation (e.g. cuts to support services provided through head office). Others had covered additional cuts using underspends from previous years. However, they acknowledged that this was only a short-term solution since accumulated underspends would not be available into future financial years.

Impact on clients

2.64 Many TSOs were keen to minimise the impact of cuts or standstill funding on clients. However, one felt that they could not provide the same level of choice and flexibility to clients where they had been required to reduce staffing levels to services, for instance provision of services was restricted to particular times and places. In addition, the provision of outreach services²⁵ , particularly in a client's own home, was becoming increasingly difficult since this was more expensive to provide. It was felt that preventative projects (for instance, health education) were under greater threat and this would impact on clients as a result. Some were concerned that generally it would be the most vulnerable clients who would be marginalised. However, since many actual cuts had yet to make an impact on service provision, it was still unclear what the actual impact on clients would be.

Impact on staff

2.65 A number of organisations had carried out redundancy consultations²⁶ and a number had made some staff redundant. A number of other TSOs had instead gone down the route of cutting staff hours. In one case, following a consultation, all staff at head office reduced their hours from a five day to a four day week. While this protected service provision, there was some concern among operational staff that they would be less supported in their jobs. In another organisation, following consultation with staff, staff had chosen to reduce their hours from a five to four day week rather than make one of their number redundant.

2.66 Some had made changes to the terms of conditions of staff. In one case, this was in preparation for the personalisation of services, to enable greater flexibility of hours. In another, the changes had been carried out in the previous year in order to reduce service provision costs and increase flexibility, and more recently the organisation had adopted a policy of reviewing posts where staff had left and only replacing them if their role could not be subsumed by existing staff. They had therefore reduced staff numbers by voluntary turnover or 'natural wastage'.

2.67 Some reported that staff workloads had increased. In some cases this was due to increased demand on services, but this may also be because of reduced hours and picking up work from staff who had left or were working fewer hours.

2.68 Generally, there was a great deal of uncertainty and anxiety among staff in the TSOs. Even where staff had not experienced redundancies, redundancy consultations, reduced hours or changes to terms and conditions, staff were nevertheless concerned about the impact of cuts on their jobs, and many had seen their relative remuneration deteriorate over several years (due to a number of years of standstill funding). These in turn had an impact on staff morale. In one organisation this had resulted in challenging behaviour from staff:

You're fighting battles on fairly minor issues that you wouldn't have expected to because of people digging their heels in, getting what they need to get out of it [the organisation], because it might not be there in 6 months.... I haven't had those kinds of [issues]...I think it's about uncertainty and insecurity...

Senior Manager, Equalities Focus Group

People are becoming more entrenched because they are feeling more insecure

Senior Manager, Equalities Focus Group

2.69 In another organisation, there had been voluntary redundancies within a small team of long-serving staff. A member of the team who was interviewed felt that this change had unsettled the remaining staff, affecting morale and resulting in an issue around increased absence through sick leave. She hoped that the team would eventually come to terms with the changes and return to normal.

2.70 However, challenging circumstances had in one case brought a small long-term staff team more together and working harder in one organisation:

I have a long-term staff team and...actually it's kind of brought them all together mainly...our workers are working harder...putting in extra hours which they shouldn't be doing to make things work, but it's not really workable in the long-term...they have a real sense of belonging to this organisation......we talked about reducing staff costs, it could be one person made redundant and what they came up with themselves was 'can we all take a day off and have a four-day-a-week?' for that team and that would stop one person being made redundant and that was very positive I thought...they wanted to keep the team spirit going.

Senior Manager, Equalities Focus Group

Conclusion

2.71 In Year Two the all-pervading message that came through was that of change and uncertainty stemming from new policies and funding programmes coming out of the new UK Coalition Government as well uncertainty about the outcome of the Scottish elections in May 2011. As one service manager noted: 'there is nothing surer than change' (Senior Manager, National Health and Social Care Provider). This could create challenges for organisations, not least the rapid pace of change itself: "Across the team we do have a fatigue, because it is always changing" (Manager, Local Health and Social Care Provider). Nevertheless, many were positive that the changes could create opportunities for improvements in the third sector:

I suppose the biggest change over the past year is that everything seems to be changing. I do not mind the direction it is going, change is very positive, but changing everything fundamentally all at the one time is a little bit risky…Everywhere I go now, more than ever before, there is a strong recognition about what the Third Sector offers: it is still all a bit in the air right now, but it will be interesting to see where it ends.

Manager, Local Health and Social Care Provider

2.72 The challenges and opportunities for third sector organisations and how they responded to them are explored in depth in the next Chapter.