Private firms and voluntary groups are to be offered cash incentives to get unemployed people into work for longer.
Private firms and voluntary groups are to be offered cash incentives to get unemployed people into work for longer.
The changes will affect about 250,000 long-term unemployed people and all new claimants for sickness benefits.
Work Secretary James Purnell said the plan, which will see more payments if someone is in work for six months, was intended to "personalise" services.
Cabinet minister James Purnell said a "radical blueprint" was needed to get people into "sustainable" jobs.
It came as MPs said 40% of jobseekers allowance claimants who find a job are out of work again within six months.
Meanwhile an MPs' committee has found that 40% of jobseekers allowance claimants who find a job are out of work again within six months.
The Tories called it "tinkering" and said Mr Purnell was trying to "steal Conservative language" on welfare.
The public accounts committee concludes: "Despite high employment levels many people cycle between work and benefits."
The figures on unemployed people not staying in new jobs came in a report from the Commons public accounts committee.
It said: "Despite high employment levels many people cycle between work and benefits."
Longer contracts
Longer contracts
Work and Pensions Secretary Mr Purnell has announced a "commissioning strategy" that will see more private companies and voluntary groups involved in finding work for people on benefits - following a review by investment banker David Freud.
Mr Purnell announced a "commissioning strategy" at a conference in London, which will see more private companies and voluntary groups involved in finding work for people on benefits.
It acts on recommendations from an earlier review by investment banker David Freud.
Instead of following the diktat of Whitehall, providers will focus on the needs of the person in front of them James Purnell
New contractors are expected to be offered incentives for getting people into work for at least six months, with further incentives planned in the future for increasing it to 18 months.
New contractors are expected to be offered incentives for getting people into work for at least six months, with further incentives planned in the future for increasing it to 18 months.
In return, they will get larger contracts which last up to seven years - twice as long as usual.
In return, they will get larger contracts which last up to seven years - the current average is three years.
The public accounts committee report also criticised the fact the government had considered 13 weeks a "yardstick" for sustained employment, saying it was "too short".
The public accounts committee report had also criticised the fact the government had considered 13 weeks a "yardstick" for sustained employment, saying it was "too short".
Paid by results
Mr Purnell said it was a "radical blueprint" aimed at getting one million people off incapacity benefit.
He told the conference the new system would be a more personalised one.
Gordon Brown is tinkering around the edges - a bit of reform here, a bit of participation by the private sector, a slight toughening of sanctions Chris GraylingConservatives
Gordon Brown is tinkering around the edges - a bit of reform here, a bit of participation by the private sector, a slight toughening of sanctions Chris GraylingConservatives
Mr Purnell said there was a "big challenge" adding: "We have got really radical goals, getting one million off incapacity benefit, we need a radical blueprint to achieve it."
"Instead of following the diktat of Whitehall, providers will focus on the needs of the person in front of them," he said.
He told BBC 2's Newsnight: "We've had a big improvement in terms of getting the unemployment level down; now we need to get the inactivity level down."
"Instead of receiving grants for service they will be paid by results and instead of telling providers how to do their jobs we will hold them accountable for what they do."
He added: "We've had three million new jobs under this government. That is not a culture of dependency, that's a real success in terms of full employment."
He said those who did not find work would be assigned to private or voluntary groups who would be allowed to "innovate".
'Economically rational'
'Economically rational'
Incapacity benefit costs the Treasury about £12bn a year. But the Department for Work and Pensions said recently the number of claimants was at its lowest since 2000.
Incapacity benefit costs the Treasury about £12bn a year. But the Department for Work and Pensions said recently the number of claimants was at its lowest since 2000.
Mr Freud has said that of the 2.7 million people claiming incapacity benefit, only 700,000 need it.
Mr Freud has said that of the 2.7 million people claiming incapacity benefit, only 700,000 need it.
Mr Freud says most claimants should be looking for work
Mr Freud says most claimants should be looking for work
He estimates it would be "economically rational" to pay up to £62,000 to a company which placed an incapacity benefit claimant in a job for at least three years.
He estimates it would be "economically rational" to pay up to £62,000 to a company which placed an incapacity benefit claimant in a job for at least three years.
Of the government's latest plans, shadow work and pensions secretary Chris Grayling said the government was trying to "steal Conservative language on welfare reform".
Of the government's latest plans, shadow work and pensions secretary Chris Grayling said the government was trying to "steal Conservative language on welfare reform".
"We've set out very clear and very detailed plans for welfare reform based on the experience in other countries, a very full package," he said.
"We've set out very clear and very detailed plans for welfare reform based on the experience in other countries, a very full package," he said.
"Gordon Brown is tinkering around the edges - a bit of reform here, a bit of participation by the private sector, a slight toughening of sanctions. Nothing like the scale of radical change we would need."
"Gordon Brown is tinkering around the edges - a bit of reform here, a bit of participation by the private sector, a slight toughening of sanctions. Nothing like the scale of radical change we would need."
The Liberal Democrats have previously welcomed the use of the voluntary and private sector to help more people back into employment, but said it must be "properly financed, and include provisions to help those with serious problems such as low skills or mental health problems".
For the Liberal Democrats Danny Alexander told BBC News he was concerned the government were giving a licence to "bring in big multinationals from overseas".
But unions have raised concerns that contracting out services will lead to job cuts and "lower standards and the exploitation of claimants".
He said: "I would like to see many of those local voluntary and private organisations who are making a real success of getting people back into work given much more scope to expand, to work locally, rather than being potentially pushed aside by big foreign providers."
Unions have raised concerns that contracting out services will lead to job cuts and "lower standards and the exploitation of claimants".
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