The payment by results mechanism is in danger of making charities more risk-averse, according to a report published today by the NCVO.

Payment by results was intended to boost innovation in public services but could be preventing charities from finding new ways of working by creating instability for service providers, the report said.

The report suggested that, for charities in particular, cashflow problems create a major barrier to taking on contracts, even in areas where they could be successful.

The report, Payment by results in the voluntary sector, said there is “limited understanding” of the impact the scheme has on the innovative capacity of the voluntary sector.

It said innovation requires an environment within which new and emerging providers can enter public service markets, yet the scheme “favours the largest providers with the largest turnovers”. It adds that market diversity is essential to innovation, ensuring providers can bring in new ideas and challenges to existing delivery methods.

The report also suggests that smaller and more specialist organisations are unable to bid in payment by results contracts because they do not have  the reserves to cover the period between starting work and receiving payment. It added that, as trustees have a requirement to be prudent with charity funds, the financial risk demanded through payment by results can be deemed unacceptable.

Other criticisms of the scheme mentioned in the report included problems with "binary" payment models, where payment is only made once the target is achieved and no payment made for progress towards the target.

The report made several recommendations, including that commissioners should use upfront payments and grants in procurement models, in order to ease cashflow difficulties and to prevent quality service providers from being excluded.

It also said charities should develop an “internal mission and value check” to monitor their own behaviours, while commissioners should monitor social value as part of their contract management processes.

Sir Stuart Etherington, chief executive of the NCVO, said: “Charities want to play their part in public service reform and have great potential to develop truly innovative solutions, improving services and reducing costs. But current PbR practice risks excluding the specialist charities we really need to involve in order to develop public services.”

Etherington added: “Few people object to the principle of paying for an outcome, but putting it into practice effectively when it comes to complex services for people with multiple needs is challenging. Many of the current models of PbR still need significant development before they are truly fit for purpose.

“Commissioners and providers must take action to improve their PbR arrangements and to learn from best practice. We mustn’t let a mechanism designed to drive innovation instead undermine it.

Today’s report draws on NCVO’s conclusions on payment by results last year, which said the implementation was “seriously flawed” due to crude implementation which resulted in missed opportunities.