Updated: Jan 10
by Kathryn Tokle
When Janis Dubno, now a managing director at the Sorenson Impact Center, began painstakingly designing one of the world’s first Pay for Success (PFS) projects in 2011 as a director at Voices for Utah Children, she wasn’t trying to fuel a revolution. She was simply trying to find a way to fund greater access for low income children to attend high quality pre-school programs in the absence of state appropriations.
Janis didn’t have new government grants to fund preschool, but what she did have was creativity, a background in Wall Street investment banking, and collaborators in the form of Goldman Sachs, the United Way of Salt Lake, and J.B. Pritzker. Together, they created the project now known as the Utah High Quality Preschool Program, which was formally launched in 2013 and has since served approximately 3,500 children in the Salt Lake City area. The project has been both successful and controversial, but above all, it has served as the inspiration for similar ventures across the country. Although Janis wasn’t thinking beyond the immediate funding challenge at the time, her work soon formed part of the prologue to a new chapter in the social sector.
Since the first few Pay for Success projects (also known as Social Impact Bonds) were launched in the US and UK between 2010 and 2013, interest in these complex funding tools has exploded, with dozens launched or put in development in the US alone. And momentum hasn’t stopped: in February 2018, Congress solidified the movement by passing the Social Impact Partnership to Pay for Results Act (SIPPRA), designed to facilitate the launch of new PFS projects and provide federal funding for successful outcomes. Yet even as Pay for Success evolves and grows, its structure remains complicated and ill-defined.
Pay for Success, Explained
Each PFS project is unique, but most are built around a common structure: a nonprofit social services provider implements an evidence-based intervention designed to solve a stubborn social problem, and a private commercial or philanthropic investor provides the upfront capital. Data is collected throughout the process for a third party to calculate the intervention’s outcomes. If the service provider succeeds (based on exceeding a set of pre-determined metrics), then a payor (typically a government agency) reimburses the initial investor and provides a return on investment. The return is designed to be to less than what the government recoups in savings or other benefits from a successful intervention. For instance, increasing rates of school readiness has been shown to reduce future taxpayer costs in the form of reduced special education expenditures and even future expenditures on incarceration. When a service provider falls short of the benchmarked metrics, however, the government is not obliged to pay the initial investors, who would then take a loss on the project.
Of course, measuring a service’s social impact and calculating the associated societal value can be difficult, and the resources required to structure a project can be prohibitive. Chad Salvadore, who serves as Sorenson Impact’s CFO and who has long been involved with the Pay for Success grants administrated by the Center, notes, “These projects definitely take persistence and a high level of rigor.” He also says that because so many social problems are deeply intertwined, it can be difficult for project stakeholders to narrow an issue down to a limited set of root causes and corresponding outcomes. “It is human nature to want to try to solve everything but attempting to incorporate too much can make projects too unwieldy to launch.” Yet in spite of the challenges, PFS projects have been successful on a number of fronts.
A Cultural Transformation
Few organizations have a longer history with Pay for Success and outcomes-based funding models than the Sorenson Impact Center. Caroline Ross, a director at Sorenson Impact who previously worked on pioneering PFS efforts at the Urban Institute, reflects that it’s important to recognize that PFS is “not a program, but a cultural transformation within the social sector.” PFS programs don’t simply change how social services are funded; they change how service providers and governments behave. They shatter the status quo of social service management.
Traditionally, service providers have only needed to keep track of outputs – for example, how many bed nights were provided to individuals experiencing homelessness – and were reimbursed accordingly. Pay for Success and other results-based funding mechanisms have shifted the focus from outputs to outcomes, and often to preventative or more permanent solutions to social problems. For instance, an early childcare provider may not only measure how many children its served, but also how its programming increases rates of school readiness and reduces future educational expenditures on supplemental services. By so explicitly tying funding to outcomes (PFS projects that fail to meet benchmarks are often quickly discontinued by contract), Pay for Success has played a key role in sparking a change in approach to social services.
Furthermore, the PFS structure requires that providers increasingly collaborate with community partners and rely on data-driven decision-making and interventions. Caroline has observed that service providers often find these habits transferring into other areas of their work and even throughout the communities in which they operate. This is perhaps the most important development to come from the PFS movement over its lifetime, as the knowledge gained and skills acquired from the rigorous PFS process have further encouraged collaboration and a focus on outcomes in the social sector.
In other words, PFS is not one-size-fits-all solution to every social problem, but it has certainly played a significant role in reorienting the social sector. And as social sector resources continue to become scarcer, it is more important than ever that the social sector embrace data-driven interventions and innovative funding mechanisms, an approach to which the PFS movement has undoubtedly made an invaluable contribution.
To learn more about PFS projects, register for the 2020 Winter Innovation Summit.