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As is well known, our nation, and particularly many of our state and local governments, currently face one of the worst budget crises in several generations. Leaders face difficult decisions around fiscal priorities, revenue sources and economic recovery strategies. Unfortunately, many politicians seem compelled to think according to a black and white budget binary: either lower expenses by cutting or reducing programs or raise revenue by raising taxes. Lowering expenses often threatens essential services for vulnerable populations, including the sick, disabled, seniors, veterans, low-income residents and students. However, raising expenses discourages economic activity, ultimately exacerbating the budgetary crisis. Neither adequately stimulates economic recovery or lessens the long-term budget problem.
Fortunately, although seemingly unbeknownst to many of our current leaders, other potential solutions that involve neither the reduction of services to vulnerable populations nor the raising of taxes do in fact exist. Increasing the cost-benefit of services provided through government dollars provides one potential solution, and as a direct employment placement organization, America Works has been doing exactly this since 1984. Underlying its success is an innovative method of contracting with government agencies that involves payments based entirely on performance. America Works is compensated only for positive performance, by placing and retaining hard-to-serve populations like welfare recipients, homeless veterans and ex-offenders with viable jobs.
America Works believes this model of service delivery provides the best potential for cost efficiency in the short and long-term. By limiting wasteful spending now and reducing future spending through results based-programming, performance-based contracting enables self-sufficiency and ultimately reduces the amount of money spent on welfare, jail, education and other government-contracted social services. This method of contracting allows the free market (rather than government bureaucrats) to create, implement and reward effective programs that can deliver the desired results. America Works believes performance-based contracting will help resolve state and local budget issues while improving service providers and resulting in tangible achievements for clients dramatically in need of help. That, we believe, is better government.
Government agencies at the local, state and federal level all support important social programs that provide essential services. Unfortunately, the services are not always provided with the effort and importance they deserve. By and large, agencies are paid to provide programs. For example, they might receive a $200,000 contract to operate an after-school program in a low-income neighborhood. They are paid primarily according to a line-item budget, listing the number of case managers, social workers, tutors and other staff providing services, the number of supplies and materials needed and some overhead. The contract is structured around inputs: what will be provided to level the playing field for the resource-poor youth in a particular neighborhood? In the process, both the government agency and the service providers lose sight of what is most important: the outcomes. Service providers are too busy ensuring they meet the government’s requirements for input (such as the number of tutoring sessions, case management meetings or career awareness workshops) that they fail to ensure the program is producing positive results.
Opening the government contracting process to free competition through a performance-based approach would place the emphasis on results, rewarding organizations that produce positive outcomes and leveling the playing field for both for- and non-profits. Using a free market mechanism, all service providers would compete to deliver the most effective programs for the least cost to government. Unfortunately, contractual power remains in the hands of tightly managed government agencies and their appointed bureaucrats, who neglect to utilize the free market to improve the cost-benefit ratio of government expenditures.
The push for welfare reform, ultimately enacted as the 1996 Personal Responsibility and Work Opportunity Reconciliation, was accompanied by a desire to reduce long-term dependency on government programs while harnessing the advantages of the market. Leaders at that time, with America Works’ encouragement, began to see line-item budgets for social services as part of the problem. The shift to performance-based contracting began to take hold as federal dollars previously spent on welfare were reallocated to job training and placement programs. State and local governments, from the City of New York to the State of Massachusetts, implemented significant strides in contracting for performance rather than process.
Unlike most social service or employment placement contractors, America Works is paid only for what it achieves: job placement and retention. Other programs are paid to operate a job training program or a job placement center, and the results are scattered and inconsistent. In contrast, America Works conducts an in-depth analysis of what is required to place a given population in jobs, and it offers the government agency a deal based on that population’s financial parameters. For example, America Works will calculate what it costs the government to pay for a family to be dependent on welfare (up to $50,000 per year), to keep a person in prison (more than $30,000 per year for an average of 6 years), and to shelter and pay for medical coverage of an unemployed veteran (up to $171,000 per year). America Works then negotiates with the agency, offering a cost far below these government-dependent alternatives and payable only upon success.
A typical America Works contract includes payments for initial job placement and retention, offering incentives for employees to retain their jobs for the critical four-to-six month period, which reflects the success of a program and the likelihood that employees will retain their jobs long-term. In contrast, it is common for the Department of Labor to issue contracts where providers receive 66 percent of their total contract if a client works only one day and 100 percent for two months.1 Other government contractors who claim to participate in performance-based contracting admitted that in reality, if a person works for between 60 and 90 days and then returns to welfare, jail or Veterans services, the contracted agency still receives between 87 to 100 percent of the total contract fee.2
The data shows that a performance-based contracting approach that bases financial incentives around proven milestones that accurately predict long-term outcomes (such as remaining in the workforce, enrolling in college or staying out of jail) remains successful. A study by the Office of the Comptroller for New York City in 1993 found that only 17 percent of public assistance recipients placed in jobs through the New York City’s Adult Training Program were working 90 days later. In contrast, data compiled by New York State showed that 88 percent of the people America Works had placed were still off welfare, three years later.
For the sake of its clients, employees and organizational viability, America Works has always insisted on a performance-based approach. This does require slightly higher start-up costs than usual – because America Works has been paid for performance in even its first contract, all overhead such as desks, staff, computers, telephones, office space and supplies had to be covered through approximately $1 million in investor funding. While America Works charges slightly more than its non-profit peers, it only charges for successful outcomes. Each time the government makes a pay-out, they achieve significant long-term cost savings.
In addition to performance-based government contracts, America Works also achieves organizational sustainability through its employer partners. Upon placement, the employee is added to America Works’ payroll for several months; like a temp agency, America Works receives a salary and fee from the company to keep this person employed. If the relationship proves mutually beneficial, the company will then take the employee onto their own payroll. This reduces risk for both sides and guarantees the employer a steady stream of well-trained employees who are matched and prepared for the job. It also allows America Works to ensure organizational viability while offering government agencies a genuine bargain that guarantees social reform – and long-term improvements on their budgetary bottom line.
Since America Works’ inception more than 25 years ago, it has grown from 200 clients placed in jobs in its first year to more than 5,000 successful placements and retentions each year today. Throughout this period, it has adapted in response to shifting need, a by-product of performance-based contracting. Instead of relying on programmatic government contracts to operate, America Works can continue so long as it continues to serve populations in need. Without having the continued operation of a specific program tied to its financial bottom-line, it can best adapt to meet demand and ensure long-term success. For America Works, this has meant a shift away from serving welfare recipients – given the drastically reduced numbers of people living on welfare achieved through reforms – and towards serving a range of new populations in need of stable employment, such as ex-offenders, veterans returning from Iraq and Afghanistan and individuals living with HIV/AIDS.
Performance-based contracting achieves positive outcomes for all parties involved—the government agency, the contractor, the employer seeking employees to fill open positions, and the clients ultimately served. By shifting risk to the contractor and power to the competition of the free market, it provides predictable expenses for predictable outcomes, facilitating a cost-benefit analysis of government expenditures. It also improves the contractor’s own operations by encouraging innovation, achieving cost savings and controlling rates, providing more flexibility to the contractor and ultimately allowing the contractor to focus on its mission-based activities.
America Works also hopes to bring its performance-based approach to help two disadvantaged populations achieve self-sufficiency, shifting resources to serve these predominately male groups. Ex-offenders and Veterans are distinct in fundamental ways, but both populations need assistance to find and maintain a job. By using incentives for the employees, the employers and the clients, America Works expects to achieve significant success with these populations, too, and our performance-based approach will remain the driving factor.
Contact the Author:Dr. Lee Bowes CEO America Works of New York, Inc. 228 East 45th Street, 16th Floor New York, NY 10017 Phone: (212) 599-5627 Email: AWbowes@aol.com
- Peter Cove, “Making Welfare-to-Work Fly”, http://www.manhattan-institute.org/html/cb_24.htm, 24, January, 2000