The Performance of Performance-Based Contracting in Human Services

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Lu, Jiahuan
Kettl, Donald F.
Performance-based contracting (PBC) is becoming increasingly attractive to public human service agencies. By attaching contract compensation to contractors' performance achievement, PBC is expected to encourage quality services, better outcomes, and less administrative monitoring. However, the burgeoning popularity of PBC lacks sufficient evidence to confirm these promised benefits. In particular, the efforts of introducing PBC into human service systems needs first to address the effectiveness problem, i.e., whether PBC really produces better results. This problem constitutes the research question of the research project. After building the theoretical framework which incorporates the literature on formal and relational contracting, this project explores the effectiveness question using Indiana vocational rehabilitation program as a case. In particular, the study evaluates PBC effectiveness from two perspectives: service outcome and participating organizations. From a service-outcome perspective, the research employs a quasi-experimental design to compare the impacts of two contract arrangements, PBC and fee-for-service (FFS), on individual employment outcomes. From a participating-organization perspective, the project runs semi-structured interviews with service counselors and contractors. Triangulating these findings, this project proposes that PBC seems more promising than FFS in human services. It also implies PBC effectiveness might not be well-rounded and should not be exaggerated. Further, the study addresses the managerial implications of the findings. The research and the practice of PBC tend to ignore the relational face of contracting. PBC as a formal arrangement is always disturbed by the highly uncertain nature of human services and thus might result in incomplete performance improvement and contractor opportunism. If so, relational contracting, using informal and normative mechanisms, may enable desirable collaborative outcomes. The combination of formal PBC efforts with relational contracting would encourage high-quality results. In sum, this project represents an attempt to systematically examine PBC effectiveness in human services. It shows the difficulties and dynamics of introducing performance management to human service contracting. It also warns the launch of PBC systems should be very deliberate and careful. More broadly, the project underscores two key components of contracting management: control and trust.