This page is part of our successful commissioning toolkit.

It is important that financial relationships with third sector organisations (TSOs) are cost-effective, that good value for money is achieved by the programme or service involved. Poor value for money means either that:

  • more needs to be spent to achieve the expected outcomes, leaving less money for other programmes, services, users and outcomes; or
  • the impact of the programme or service is less: fewer users receive the expected benefits or outcomes; or all or some users benefit less than they should.

Those are high-level statements. What can you do to increase cost-effectiveness in actual financial relationships with TSOs? There are six areas to focus on:

  • Impact.  Make sure your programme is really focused on outcomes, the impact on service users and communities that you are seeking to achieve, and not just on outputs, process or inputs.  Not all outcomes will be obvious, direct or easily valued. You and/or providers may need to use evaluations and techniques such as Social Return on Investment (SROI) to establish the full impact of a programme and its worth. [Note 1]
  • Priorities.  Make sure your programme is focused on those outcomes that are priorities in terms of both:
    • analysis of greatest public need; and
    • the priorities of your governance group [Note 2].
  • Take a long term view, where possible.  You should seek the optimal combination of:
    • whole life cost – this is the cost, from start to finish, of the delivery of the agreed volume of the service you require to the agreed quality and timescale. It should include any start up and exit costs that you have to meet as well as the direct funding to the provider for the service; and
    • control of costs – make sure you and your provider keep control of costs. Small, unnecessary or excessive costs can quickly snowball. It is easier to control a cost before it has materialised than after it has occurred.
  • Use competition, where appropriate, to help you choose your provider.  The Office for Government Commerce (OGC) [Note 3] says value for money ‘should normally be established through the competitive process. A strong competition from a vibrant market will generally deliver a value for money outcome’. Competition can be used in procurement or grant.
  • Increase the efficiency of TSO providers. Commissioners can play a role in this: through investments in capacity; through the use of competition; or through a targeted value for money study.  Present this in the right manner and try not to make it sound threatening to the TSO.

Practical example: Value for money and TSOs

A government department has a financial relationship with a national TSO to promote the use of family-friendly employment practice in small businesses. During the recession, the scheme is coming under pressure from those who would take a more hard-nosed approach to financing business support.

The programme manager in the department decides to review her scheme to ensure it provides the best-possible efficiency. First, she reviews the outcomes and priorities. The scheme’s outcomes are based on business growth through better design. At the general level, that will remain unchanged. But, until now, the scheme has been open to all businesses below a certain size. Working with stakeholders, it is decided to prioritise small, young businesses.

The manager continues to assert the long-term economic and financial benefit of the programme and supports this with evidence.

The manager decides to take a tighter hold on the business processes of the scheme. In particular, the process of outcome-setting and resource allocation between the department and the TSO will be slimmed down.  And the process for the small firms to access the TSO’s support will increasingly be delivered online from now on.

Finally, the manager decides to make a targeted, one-year investment in the TSO’s capacity.  She also leaves open the option of competition to be the provider in future years.


Note 1: Guidance on Social Return on Investment (SROI) can be found on the SROI Network website.

Note 2: Ministers in central government departments and agencies, the board in non-departmental public bodies and local NHS bodies, and leading councillors in local government.

Note 3: The Office for Government Commerce is now part of the Efficiency and Reform Group in the Cabinet Office.

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