Innovation researchers have conclusively proven what I have seen over a lifetime as an entrepreneur – in every innovative effort, there comes an innovation chokepoint. It’s at this moment when fatigue can set in. When critics are often the loudest. When the idea alone is not enough. This chokepoint is an important place to pause and reflect. Sometimes, the success to date is enough to encourage you to marshal resources and forge ahead with a revised plan and renewed energy. Other times, though, success is unproven, and you realize that the experiment, while instructive and admirable, does not merit continued effort.
We are at the innovation chokepoint for Pay for Success. Social Impact Architects started covering Social Impact Bonds (SIB) / Pay for Success (PFS) (both terms are now used interchangeably) in 2013 when the United States imported the idea of Social Impact Bonds. We have continued to follow them closely ever since. Now, the model, which has been vetted by researchers, is in full experimentation across many states and many issue areas. Even the federal government sees promise in Pay for Success.
Since this model arrived in the U.S., we have seen the success and failure of Pay for Success contracts. (See our analysis of the Rikers Island work in our 2015 blog post.) I have also been privileged to work closely on an amazing Pay for Success project in Fort Worth, Texas, and have learned some hard-won lessons that I’d like to share as we ask ourselves what this means now for the social sector.
What is Pay for Success?
Pay for Success is a form of financing where the government pays only if a social intervention achieves results. Pay for Success is typically used to fund a chronic issue that has been proven to impact an individual’s lifetime and costs society money – recidivism, quality early childhood education or homelessness. Because the government is often constrained from funding these services, private investors, such as foundations and banks, provide upfront capital to support high-quality, long-term services to a specific population. Nonprofits, which have previously documented evaluations of impact and cost-effectiveness, provide these rich services to the population with the goal of successful outcomes, both for the individual and society. They are paired with an evaluator to ensure impact and a technical assistance provider to assist with hurdles. Once positive impact (the difference between what happened with the services versus what would have happened without) is reflected over a period of time, the government repays the investors. If positive impact isn’t proven, no payment is given.
Why are we investing in Pay for Success?
We need new ways to fund great ideas in the social sector. Pay for Success allows us to provide services that may not otherwise be funded. It is an opportunity to pay for comprehensive services that can change the trajectory of an individual’s life and thus save money in the long run. It also allows us to prove that these services work and provide future cost savings, so the government may directly pay for these services in other communities – without a Pay for Success model.
What have we learned about Pay for Success?
We are fortunate that our friends at Nonprofit Finance Fund recently produced a great report on the First 25 Pay for Success projects and have fairly evaluated where we are today. If you have a project in mind, check this list first and see if it is being done or has been done. It may lead to new thinking in your own work. It is also worth revisiting the Corporation for National Service’s excellent report from 2016. Although it is a little outdated, it is rich with insights.
These reports show that we now have enough evidence around the Pay for Success model to really evaluate it. Pay for Success is proving a number of things:
- This work is complicated, and not as easy as it appears. But, Pay for Success has proven that the conversations around system change are crucial to social change.
- This work has to be led by social sector providers who know their clients well and know what works. These providers live in constrained environments, jumping from one grant to the other to build the best program that they can from year to year. This isn’t ideal, but it is the reality of the nonprofit work. To leapfrog this approach into an ideal program or continuum of care that has virtually unlimited resources is a mindset shift.
- This work needs to measure success along the journey rather than just at the destination. The ultimate measure of success has been whether investors get their money back. But, we need to recognize that the process improvements alone make a difference and will often be long-lasting.
- This work has generated different conversations everywhere. In part due to the momentum of impact investing, nonprofits and funders are adopting new vocabulary leading to improved efficiency and effectiveness. This is hard to measure, but easy to see.
- This work has to lead to a better granting process. In the social sector, we are constrained by many aspects of “how we do business” and our funding process is a good place to start. This work has revealed that to truly make an impact, we must address how our work is funded.
How do I know if I’m ready to pursue Pay for Success?
This spring the U.S. Treasury announced a Round 1 opportunity for “shovel-ready” projects under the Social Impact Partnerships to Pay for Results Act (SIPPRA). Round 2 of funding will begin this fall for feasibility studies. If you are interested in testing your program to see if it could be a Pay for Success Project, check out this great tool from the Urban Institute. If you find that you have an eligible Pay for Success project needing a feasibility study, we highly recommend our friends at Third Sector.
At this critical moment, we remain cautiously optimistic about the Pay for Success model as a driver of individual social change, but also as a force for good in the social sector. We have to be relentless in testing this model and ensuring that its benefits outweigh the costs. We also have to be diligent about sharing the lessons learned widely so we clearly get a dividend on the individual Pay for Success projects. If you have additional thoughts on this topic, we would love to hear them.