Advise | Design | Integrate | Deliver Subcontractor fee structure – FND Phase 1 Manchester 8 th June 2009

2 Introduction to subcontractor funding FND procurement resulted in DWP defining two funding models and accepting two performance offers. DWP plan to apply the most recent, widely described as the 60/40 funding model, for the first 18 months of the contract, along with the revised performance offer which we submitted. Thereafter the 80/20 funding and offer will apply. In light of this change in funding Serco have developed a second funding scheme for each step of our FND service. Serco’s Subcontractors will have the option of choosing their preferred funding option (either the 60/40 or the 80/20 model) for the first 18 months of the contract. Thereafter everyone will revert to the 80/20.

3 What funding is available? DWP’s funding is based on an average of £1409 per customer –This level of funding per customer is maintained in the revised budget –There is no cap to funding, so over-performance will be rewarded Serco have sought to ensure that there is sufficient funding at each step of our FND service by considering –The anticipated number of FND customers –Targeted performance for jobs and sustainability, and expected drop outs, at each step –The number of customers therefore expected to flow to each step –Adjusted risk and reward in outcome payments to create incentives for high performance but also to provide Day 1 funding –Funding at each step to create sufficient cashflow/surplus/profit to maintain reasonable staffing levels over the contract life

4 How does Serco make money? Serco built into our bid pricing an overhead that includes risk contingency as well as margin –In total this is between 12% and 14% of total costs Serco’s profit comes from the generation of 13-week and 26-week fees. But these fees represent a higher proportion of our income than in our funding model for our Subcontractors –Serco would lose money if performance is substantially below expectations, at any step in the service –Serco would lose money because the start fees we pay to Subcontractors are substantially greater than the service fee paid to Serco This is a 5-year contract with 6 years of service delivery, the contract will be managed with a view to the whole contract life –Serco will not recognise profit on this contract for the first year of the contract

5 How have our minimum standards been set? In setting Serco’s performance offer we –Took a view on current and expected performance –Looked at available funding –Assessed the lowest performance offer that would win the competition but create the largest funding available for Subcontractors’ service delivery We have set the minimum standards by step based on –Overall performance offer –Historic performance levels –Consultation with Subcontractors on what is reasonable We have provided DWP with two performance offers –The first 18 months is roughly 5% lower than our original offer –When DWP allow we will immediately share our performance offer with Subcontractors

6 Why two funding options? We designed and communicated to all Subcontractors one funding option as part of our original bid. We remain committed to this funding option as our preferred solution –DWP will require Serco to commit to this original performance offer from 18 months into the contract onwards –This offer, Option 1, provides higher funding for higher performance During the first 18 months of the contract the following will apply –Increased start fees will increase guaranteed earnings for Subcontractors –Reflect the lower performance offer provided to DWP for this period Option 2 funding aims to –Provide more guaranteed funding in the first 18 months –Ensure overall funding is consistent between our two models –In Option 2 a larger proportion of fees is linked to start payments alone

7 Funding – Option 1 Step 1Step 2Step 3 Minimum standards Starts into work35%25%35% Jobs sustained to 13 weeks80% 13weeks sustained to 26 weeks85% Start £ Job £ w £ w £

8 Funding - Option 2 Step 1Step 2Step 3 Minimum standards Starts into work30%22%30% Jobs sustained to 13 weeks80% 13weeks sustained to 26 weeks85% Start £ Job £ w £ w £

9 Comparing funding options The following slides consider the payments that would be made to a Subcontractor per 1000 starts Job % is the percentage of starters on that step who get a job We have assumed 80% sustainability to 13 weeks and 85% sustainability to 26 weeks for all job starts The analysis also shows –Average funding per start for a given performance level –What percentage the start fees represent of total earnings

10 How funding compares – Step 1 for 1000 starts Option 1Option 2 Job %25%30%35%40%25%30%35%40% Starts/£ ,000 Jobs/£100,000120,000140,000160,00050,00060,00070,00080,000 13w/£160,000192,000224,000256,000105,000126,000147,000168,000 26w/£136,000163,200190,400217,60068,00081,60095,200108,800 Total/£396,000475,200554,400633,600473,000517,600562,200606,800 £ per start % as start fee0% 53%48%44%41%

11 How funding compares – Step 2 for 1000 starts Option 1Option 2 Job %17%22%25%30%17%22%25%30% Starts/£200, ,000 Jobs/£34,00044,00050,00060,00021,25027,50031,25037,500 13w/£108,800140,800160,000192,000102,000132,000150,000180,000 26w/£92,800120,000136,000163,20063,80082,50093,500112,200 Total/£435,600504,800546,000615,200487,050542,000574,750629,700 £ per start % as start fee46%40%37%33%62%55%52%48%

12 How funding compares – Step 3 for 1000 starts Option 1Option 2 Job %25%30%35%40%25%30%35%40% Starts/£155, ,000 Jobs/£75,00090,000105,000120,000125,000150,000175,000200,000 13w/£320,000384,000448,000512,000190,000228,000266,000304,000 26w/£195,500234,600273,700312,800119,000142,800166,600190,400 Total/£745,500863,600981,7001,099,800784,000870,800957,6001,044,400 £ per start , ,044 % as start fee21%18%16%14%45%40%37%34%

13 How funding will work Subcontractors will be given the choice of Option 1 or Option 2 funding for the first 18 months –Our Contact Managers will apply the minimum performance standards of Option 2 to all Subcontractors, even if they select Option 1 funding –Funding is attached to each individual based on their start date After 18 months, all Subcontractors will revert to Option 1, for both funding and minimum performance standards –DWP may choose to delay the switch beyond 18 months, depending on ‘economic triggers’ yet to be decided. If they do, this delay will be made available to Subcontractors