Forms of contractual arrangements between employment services

108 Pages·2012·1.96 MB·English

Forms of contractual arrangements

between employment services

Small scale study 2012

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Employment, Social Affairs & Inclusion
Forms of contractual arrangements between employment services
Table of contents
Introduction ...................................................................................................... 3
Section 1. Rationale for contracting-out employment services ................................. 4
1.1. Background and policy context .................................................................. 4
1.2. The conceptual framework to analyse contracting-out ................................... 5
Section 2. Contracting-out experiences in the USA and Australia ............................13
2.1. Brief history ............................................................................................13
2.2. Development of contractual arrangements .................................................15
2.3. Results achieved and improvements from the first implementation ................17
2.4. Lessons for PES from the experiences of the USA and Australia .....................20
Section 3. Key elements from European experiences of contracting-out ...................22
3.1. Brief history of the studied experiences ......................................................22
3.2. Experimented market profile and contractual arrangements .........................24
3.3. Impact analysis of some contracting-out experiences ...................................27
3.4. Lessons for PES from some European experiences .......................................30
Section 4. An overview on current PES contracting-out experiences in Europe ..........32
4.1. The importance of contracting-out and recent trends ...................................32
4.2. The main reasons for contracting-out .........................................................35
4.3. Territorial scope of contracts .....................................................................38
4.4. A general map of contracted-out services ...................................................38
4.5. Local strategies in a decentralised system ..................................................48
4.6. Main findings from the survey on contracting-out ........................................49
Section 5. Current PES experiences of contracting-out ..........................................52
5.1. Objectives of contracting-out ....................................................................52
5.2. Contractual strategies to attract better providers and ensure quality .............54
5.3. Boosting outcomes through contractual strategies .......................................57
5.4. The role of local PES ................................................................................61
5.5. The development of contracting-out and related risks ..................................62
5.6. Lessons from the examined experiences ....................................................64
Section 6. Conclusions and indications ................................................................66
References.......................................................................................................71
Annex 1– Questionnaire of the survey on contracting-out in Europe ........................74
Annex 2– Case Studies ......................................................................................79
Austria: Flexibility consulting for companies ......................................................79
Belgium (VDAB): Contracting-out services to provide jobseekers with a wider range
of support .....................................................................................................85
Denmark: Contracting-out services for “academics” ...........................................87
France: Contracting-out services to better respond to jobseeker needs.................90
Germany: Contracting-out services to ensure an efficient allocation of public funds 92
Lithuania: Contracting-out vocational rehabilitation services ...............................94
The Netherlands: Framework for purchasing re-integration services for young
disabled persons ............................................................................................96
Slovenia: Contracting-out programmes and services ........................................ 100
United Kingdom: The Work Programme .......................................................... 103

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Introduction
The aim of the study is to develop an overview of the contracting-out practices of
European Public Employment Services (PES) through a mapping of contractual forms
and related management and operational issues. The study is focused only on market-
oriented contractual arrangements, where all parties act under private law, and leaves
out other types of formal or non-formal agreements (i.e. agreements between
federations and PES based on equal footing). This follows an explicit request from PES
interested in knowing the different mechanisms by which to manage formal
agreements. However, it has also been a methodological choice resulting from the lack
of systematic information and the fragmented nature of informal cooperation, which is
mainly defined at local level and with a plurality of networks for different clients. Since
many PES have recently started contracting-out, the study intends to favour the
exchange of experiences with PES which have a longer experiences in contracting-out
and this suggested restricting the analysis to the formal agreements.
In particular, the main interests of the study are to investigate the extent to which
PES are contracting-out services, the types of services and client groups covered, the
main reasons for services being contracted-out rather than being dealt with through
in-house solutions, the forms of contractual arrangements in place, and the types of
monitoring and assessment of service delivery that are implemented. The main
specificities and limitations of the arrangements and the extent to which contracting-
out practices can be effective in offering qualified services to different target groups,
some experiences of contracting-out practices will be analysed more in detail through
case studies in order to consider contracting-out from the perspectives of both the
purchaser and the contractor.
The study is organised as follows. The first section summarises the main research
questions and the structure of the analysis. This means exploring the main reasons for
contracting-out services, underlining, thereby, the institutional processes that
introduced ‘contracting-out’ into PES activities, and identifying the basic concepts
needed to describe contracting-out. The second section is devoted to a brief review of
the results obtained in recent years in the countries that first introduced contracting-
out of employment services and quasi-market management models: the USA and
Australia. The third section reviews what has happened in a few European countries
with well-established contracting-out experiences. The fourth section exploits
responses to a questionnaire completed by members of the European network of PES
in May 2012 in order to map the actual use of contracting-out amongst European PES.
Section five then goes into more detail to look at the common features of some
specific current cases of contracting-out (the underlying case-studies are included in
annex to the study). Finally, the sixth section summarises the most important findings
of the study and the lessons for PES that are interested in developing contracting-out
policies.

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Section 1. Rationale for contracting-out employment
services
1.1. Background and policy context
PES activity in recent years has been changing in order to face new labour market
challenges. In particular, with the aim to diversify and increase the variety of services
provided and the search for increasing efficiency, the role of PES as a direct provider
of employment services has reduced in many countries and the market has gradually
opened up to competition between public and private bodies.

According to some authors, during the 1990s PES were characterised by a shift from a
model of “management by regulation” to one of “management by objectives”1. This
means that PES had to increasingly focus on performance and efficiency. In fact, the
first model (by regulation) is based on a hierarchy of organisation and procedures;
these hierarchies are (or were) typical to public bureaucracies and functional to the
administrative processes connected to the functioning of the labour market; this
model was useful as long as the PES had a monopoly over labour intermediation and
the labour market was characterised by homogenous supply and demand. The second
model (by objectives) reflects the increasing attention paid to the clients of the
employment services and the increasing orientation to preventive and activation
services in an increasingly fragmented and complex market. In this respect, various
strategies have been developed in the management of services in order to go beyond
that of simple administrative functioning. However, a unique or better model has not
yet emerged and a learning process is still on-going. This is a key point for the study
because the absence of a prevailing managing model obliges PES to choose from
among a range of uncertain outcomes, often with limited financial and human
resources and subject to important constraints from the institutional and local
context(s). Consequently, contracting-out decisions can refer to different management
models and provide answers to different organisational issues.

In 1997 the International Labour Office (ILO) adopted the Employment Agencies
Convention 181, which formalised the end of the PES monopoly for placement
services2. The abandonment of the long-held placement monopoly created an
employment services market and allowed for the entry and growth of private service
providers. In this way and as result of several administrative reforms and liberalisation
implemented during these years, governments also sought to increase the efficiency
of public services vis-à-vis competition with private providers. The PES were forced to
do more and improve their performance and as a consequence their former role of
monopolistic provider gradually changed to that of a coordinator acting in a context
characterised by increasing partnerships and/or competition among different services
suppliers.

The European Commission has encouraged the development of employment service
partnerships and the active role of different service providers on the labour market. In
order to play a new and more active role in the implementation of the European
Employment Strategy, the Europe 2020 Integrated Guidelines for the economic and
employment policies of the Member States3 call upon PES to be more active in their
cooperation with a number of private, public and third sector employment services.
The network of European PES noted this trend in a recent common working document4

1 Weishaupt, J.T. (2010)
2 Phan-Thuy, et al. (2001).
3 European Commission (2010), Guidelines for the Employment Policies of the Member States – Part II of
the Europe 2020 Integrated Guidelines, COM(2010) 193 final, Brussels 27 April 2010.
4 PES 2020 – Mapping visions and directions for future development (June 2010)
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affirming that “networking and outsourcing will become routine” and that it is
“important to strengthen the linkage and exchange between PES and other policy
stakeholders at national and European level, including a broad range of actors in the
fields of employment, education, career guidance and social services as well as social
partners”.

Finally, in the 2010 "Agenda for New Skills and Jobs"5 the European Commission
paved the way for non-legislative action aimed at setting up a platform to promote
partnership - PARtnership between Employment Services (PARES). Promoting
cooperation among service providers is one of the main objectives of PARES and the
PARES Launch Conference in 2011 recognised that an analysis of the different
contractual arrangements currently used by PES around Europe is crucial in order to
understand the current situation, the effectiveness of current practices, and the
potential for future development. Furthermore, European guidelines adopted by PES
focused on several crucial outcomes regarding labour market participation, functioning
and skill upgrading6. In service provision, outcomes are tightly linked to process
organisation and staff competence; for this reason, contracting-out can be considered
both an important tool for PES strategy and a significant challenge. In fact, the
implementation of an efficient subcontracting system takes time and is not a
straightforward undertaking.

The recent EC Communication “Towards a job-rich recovery” once again underlines the
importance of partnerships between different employment services to give support to
a better implementation of employment policies; in this context, and with the aim of
improving labour market conditions, PES have to act as “transition management
agencies” which mobilise all the actors and services.

The recent economic crisis and the consequent impact on labour markets and public
budgets has accelerated the transformation of PES towards more flexible and adaptive
organisations7; the number and the variety of employment services is increasing,
public resources are scarce and labour demand is ever more unstable and diversified;
consequently contracting-out is one of the most important instruments available for
responding to these new demands while, at the same time, ensuring that public
employment services are kept at a reasonable size8.
1.2. The conceptual framework to analyse contracting-out
In the light of the above mentioned innovations in employment services policy, the
space for contracting-out public services has been greatly enlarged, not only because
a new legal framework has made this easier in many countries, but also because new
suppliers and new types of services have developed outside of public financing. As we
shall see below, this possibility has been widely used, with a great variety of solutions
regarding the kind of service contracted-out, the recipients, the rules and the forms of
contracts.

In this respect it is also necessary to highlight the large variety of actors and their
mutual relationships in the market of employment services. Among public actors, PES

5 European Commission (2010), An Agenda for New Skills and Jobs: A European Contribution towards Full
Employment, COM(2010) 682 final, 26 November 2010.
6 PES and EU2020: making the employment guidelines work, Adopted by Heads of PES in Budapest,
Hungary on 23-24 June 2011.
7 The increasing attention to business model of PES and the exchanges on this between different PES reflect
this need (see Operational conclusions of the Meeting of the Assistants to Heads of PES, March 2012)
8 In general terms, this process is not very different from what occurred in the 1970s and 1980s when large
enterprises subcontracted important parts of their production to a large number of SMEs in order to remain
efficient and adapt themselves to an increasingly flexible and specialised demand.
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are mainly in charge of placement activities and dealing with recipients of
unemployment benefits, while local authorities generally deal with social services and
recipients of social assistance. At the same time, both PES and local authorities may
deliver employment services such as training or other forms of active employment
market programmes. Private actors include profit and non-profit organisations; the
former are private agencies that generally tend to be highly specialised and focused
on a specific segment of the market; the latter are usually represented by voluntary
organisations that deal with selected disadvantaged groups. Private providers can be
totally separated from PES or they can be interconnected by means of partnership
agreements (information exchange, service process interconnection, staff cooperation,
etc.). Moreover, interest groups such as trade unions and employers’ organisations
play a major role in defining policy objectives. However, they sometimes also manage
employment or training services themselves. Hence, the policy arena of employment
services now includes a large number of actors, interests and mutual relationships
which influence the experiences of contracting-out. In order to explore contracting-out
experiences we approach our study primarily from the PES point of view. Accordingly,
the map of the different uses of contracting-out and its relationship with developed
partnerships is analysed with the focus on the implications for PES management and
organisation.

The main objective of the study is to present an overview of PES contracting-out
practices in order to identify the main contractual arrangements used by PES and
indicate the impact these contractual arrangements have had on management and the
functioning of employment services. The main questions to be addressed are:
 Why do PES contract out services?
 What types of contractual arrangements do they use to manage the services
they contract out?
 What contextual conditions can facilitate (or limit) their contracting-out
practices?
 What are the implications for PES organisational choices, tools and
competences?
1.2.1. The reasons for contracting-out
In general, a need for new capacities of intervention or increasing efficiency in service
implementation lies at the origin of the decision to contract-out. However, these two
main reasons can be expanded in a wider range of different motivations:
 Market reasons (increased demand for certain services);
 Organisational reasons (changes in the PES organisation, or need for
innovation in services delivery);
 Quality reasons (skill shortages within PES);
 Economic reasons (cost reduction);
 Institutional reasons (national legislation requirements, changes in policy
orientation).

While each of these possible reasons affects specific aspects of the service (cost,
volumes, flexibility, quality, etc.), the result must take the final service for the clients
into consideration. Therefore, it is useful to have a global vision of the service
performance and interpret the logic used by PES in contracting-out on this basis. In
this respect, the reasons for contracting-out are connected to specific contributions
expected from the external service: to be highly specialised (i.e. for difficult to place
specific groups), mainly complementary (for increasing capacity of serving
mainstream clients), or mainly functional (i.e. providing particular types of services
such as e-services or call centres).

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Understanding PES contracting-out decisions requires paying attention to the PES
organisational approach. The decision to 'contract-out'9 a service is connected to a
specific governance of public services, because it changes the management strategy
and the distribution of activities within and outside the PES.

These implications are not obvious: they run the risk of being ignored because of the
complexity and the wide range of the possible reasons for contracting-out. But,
contracting-out services should always be considered a possibility: in order to assess
the different solutions PES have to consider the impact on the service. This emerges
clearly both in policy orientations at the European level and in the scientific
literature10. Concerning employment services, the impact - defined as the difference
between the situation created by the contracting-out and what would occur in the
absence of the contracting-out - has to be measured on the capabilities11 and,
consequently, the status (in terms of placement, activation and social assistance) of
the recipients.

Since the 1980s the literature has identified several factors that contribute to
determining the quality of a service and those which are central to achieving an effect
on the clients12. Concerning employment services, a set of useful criteria for changing
the governance of the service is the following13:

Criterion Aim of the change in governance
Efficiency to minimise costs in comparison to a determined level of outputs
Responsiveness to make the service more flexible and sensitive to individual needs
and preferences
Quality to enhance the focus of implementation processes and outputs on
the needs of the clients
Choice14 to increase the responsibility and freedom of clients and to
increase competition among service providers
Equity to ensure equal access and avoid creaming effects

These criteria are functional to the fundamental objective of improving the services
delivered. It should be noted that possible trade-offs between the listed criteria have
to be carefully assessed and always in relation to the effectiveness of the service. For
example, a reduction of costs can be positive, but only if it does not result in a
reduced quality of service. This is relevant not only from a social point of view but also
from a more general economic one. Studies on the impact of social policies show how
the reduction in the number of unemployed people bring significant economic benefits,
which are often not comparable to a limited saving in cost of employment services15.

9 To be distinguished from privatisation and from outsourcing. With privatisation a public sector function is
moved permanently into the private sector with a change in the owner’s structure and in the way of
financing. Outsourcing and contracting out are the same from a purely administrative/legal point of view,
but outsourcing is about control of the market, while contracting out (in a competitive market) is, to a
certain extent, about control by the market. Contracting out is often understood as outsourcing by a public
provider; in a broader sense contracting out means that the former public sector function is subject of
private sector competition, where the public provider can continue to act as one of the competing actors.
See Struyven, L. (2004).
10 The aims of active labour-market policies in general: 1) to improve the employability of the unemployed,
2) increase the efficiency of job searching (in contrast with passive policy, which provides benefits for those
without work), 3) secure job outcomes and improve equity (Productivity Commission, 2002). From
Struyven, L., Steurs, G., (2004).
11 For the concept of capacity see Sen, A.K. (1992) & (1999).
12 Zeithaml, Parasuraman & Berry (1990).
13 Le Grand and Bartlett (1993); Le Grand (2001), in Struyven, L., Steurs, G. (2004).
14 Using the voucher system, which enables the client or customer to shop around between providers
15 Marmot review, see http://www.instituteofhealthequity.org/projects/who-european-review
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Similar considerations can be made for the other mentioned criteria16. Many possible
reasons for contracting-out services have been identified and the literature proposes
various, but clear, criteria to analyse the effects of these changes on the supply of
services available to the final clients.
1.2.2. The choice of improving performance and the contractual
arrangements used by PES
The second question investigated in the study concerns the types of contractual
arrangements that PES use to manage the contracted-out services. The contractual
agreement identifies the mutual obligations between the two parties and determines
the values of the contracted-out services. The study does not examine the legal
implications of the different forms of contractual agreements because this is beyond
its scope and also because there are significant differences between states. It does
however focus on organisational aspects deriving from the legal framework to
investigate orientation to results of the agreements and their implications for the
management and monitoring of contracting-out.

Accordingly the study describes the diffusion of contracting-out and the forms of
procurements and contractual arrangements normally used by PES in Europe. In this
respect, a consolidated stream of literature17 proposes, as reference, the following
three main categories of contractual agreements:

 Cost-reimbursement contracts: in these contracts providers receive payments for
the expenses they incur. Generally, costs must fall within a budget approved during
the procurement process. Some cost-reimbursement contracts specify performance
standards, but payment is not dependent on meeting them.
 Fixed-price contracts: fixed-price agreements establish a set fee for subcontractors,
regardless of performance or the actual cost of providing services. As with cost-
reimbursement contracts, the contracts may include performance measures, but a
contractor’s performance does not directly affect payments.
 Outcome or performance based contracts: under these contracts, providers are
paid some or all of the payments on the basis of achieved job placement results.
Performance contracts specify a wider range of measures which may include job
outcomes, but also other factors, such as assessments made, action plans agreed, and
so on.

In order to choose the forms of procurement and the contractual arrangements with
which to manage the contracting-out service, PES have to consider two central points:
the incentives for providers and the control mechanisms of the results. The possibility
of a real improvement of the service, therefore, depends on the micro-regulatory
mechanisms of competition that are adopted and on contractual stipulation. Moreover,
the efficacy of these rules also depends on the characteristics of the context in which
they operate.
At this stage it is worth remembering the types of governance actually practiced by
PES according to the literature which has analysed and classified 'contracting-out'.
Considering one of the most popular typologies18, four types of governance (see list

16 The effects of the changes in the employment services must also take into account the different position
of their recipients. For instance, gains in the level of skills and employability of disadvantaged groups of
recipients must not be considered as a real improvement in service performance if it is associated with a
worsening of their position in comparison to other groups.
17 See McConnell et al, (2003) in USA and Struyven, L. (2004) in Europe, cited by Finn. D. (2011).
18 Shaan, (2007); Sol and Westerveld, (2005).
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below) are related to four different types of regulation of the relationships between
contracting parties:

 The bureaucratic model; a purely administrative approach that does not pursue and
evaluate impact or use incentives. Internal hierarchy and bureaucratic rules regulate
the functioning of this model and promote increases in performance; this model is not
open to contracting-out and operates internally to the organisation.
 The Management By Objectives (MBO) model; pursues and evaluates impact and
uses internal competition (between different operators, teams, offices, regions, etc.)
to promote performance and internal incentive schemes. It must be underlined that
motivation can also be based on non-monetary incentives. The MBO model is based on
organisational arrangements that use cooperation and encourages the involvement of
workers and motivation to promote performance. This model does not involve
contracting-out as an important instrument for increasing performance;
 The quasi-market model; pursues and evaluates impact and uses competition
between external providers and incentive schemes to increase performance. The
market is used to regulate competition and the procurement is typically through
competitive tender. This model is regulated by market rules but is called “quasi-
market” because, unlike a regular market, purchasing power comes from the state (Le
Grand, 2001) and not directly from consumers;
 The preferred supplier model; pursues and evaluates impact and uses external
cooperation between selected partners and external incentive schemes to promote
performance. Long-term relationships and trust between parties are used to regulate
competition. Solidarity networks, partnerships based on territorial and professional
relationships and other important forms of cooperation19 can be classified under this
model. It can also include relationships based on personal or organisational interests,
lobbies and other non-common interests. In this case the profile of the provider is
more important than the offer in the call for tender and short listing or direct
bargaining are more often used. In the case of tenders, price is not the central
reference, but some resources of the provider are considered essential qualities.

It is principally the last two models that relate to contracting-out of services and the
regulation of the external relationships of PES. In general, the literature proposes the
“quasi-market model” as the basic model to promote and achieve contracting-out
based on competition. However, PES practices of contracting-out are not easily
traceable to one unique model. General or niche contracted-out services; competitive
tender or direct bargains and long-term cooperation with different bodies are regularly
and contemporarily used by PES. PES may decide to contract out services choosing a
“quasi-market” approach, but at the same time can establish preferential relationships
with partners characterised by trust or institutional relationships. In order to improve
the offered service, the two models are potentially similar because they create an
incentive structure that drives the service to align it with the objectives.

Therefore, in order to properly analyse the contracting-out experiences, these models
have to be carefully used. They provide a general framework to include all the
different approaches to internal organisation (the first two models) and to external
relationships (the second two models), but they cannot identify, ex-ante, a
preferential model.

19 Ouchi, W.G. (1980).
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1.2.3. The contextual conditions for contracting-out
The institutional and policy context within which PES operate can both facilitate and
limit their practices regarding contracting-out. From a legal point of view, the rules
governing relations between public and private entities in the procurement of services
are relevant. From the point of view of the economic and operating conditions of the
market, each national or local context is characterised by different presence of
potential providers, by specific levels of social capital and long-term trust between
service operators and other actors.

Finally, there may be tools and knowledge in a specific context which can deter
opportunistic behaviour. For example, information on the past performance of private
providers in the market discourages opportunism and directs the selection criteria
towards aspects which are relevant to the efficiency of the services.

Therefore, the functioning of the market is constrained by rules defined at European
and national level, and even at local level. This applies to the legal aspects, but also to
economic and cultural aspects, which are very different, sometimes even within the
same country. Because of this, the study cannot examine in detail every single
national or local context where contracting-out has been developed, but it does, in
analysing the feature of the main contracting-out experiences, take this domain into
consideration.
1.2.4. The organisational conditions and critical issues to optimise
contracting-out
The study gathers information on the implications of the different contracting-out
experiences on PES organisational preferences, tools and competences. For instance,
it is necessary to investigate the relationship between internal innovation and
innovation through 'contracting-out'. The PES can develop innovations on both sides,
or invest only in one type of innovation (external services or internal organisation).
This choice affects the implementation of the employment services and the expected
feed-back from contracting-out, not only in terms of the immediate provision of
services but also of the possible lessons to learned.

Another crucial point concerns knowledge of the contracted-out services and outputs.
While the monitoring of the employment services is essential in managing and
assessing both internal and contracted-out activities, it also allows PES to choose
whether 'contracting-out' or not ‘contracting-out’ is better However, the literature
often highlights the lack of adequate information to evaluate contracted-out services.

An additional point is the kind of regulation implemented to motivate and control
providers and to achieve the required results (improvement of the quality of the
services or improvements of efficiency, etc.). Some authors20 argue that to implement
a system of governance (quasi-market model) where private providers are fully
involved certain conditions have to be met and that compliance with these conditions
is an important element in promoting the efficiency of the actors and improving the
quality of the services. Two levels of regulation can be distinguished: incentive
structure (what attracts provider investment and drives competition) and market rules
(what avoids distortions in competition).

The incentive structure should allow suppliers an adequate return on investment and
an improvement of the service in the medium- to long-term. For instance, in a
performance based contract, the incentive is strictly related to the outcome, while in

20 Le Grand and Bartlett (1993)
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