This is a guest post by Bill Pinakiewicz, the Director of the New England Program for the Nonprofit Finance Fund (NFF). Bill is a senior member of the NFF team that has been engaged by the Rockefeller Foundation to assess the feasibility of using the Social Impact Bond and other Pay for Success approaches in the U.S. social sector.
By Bill Pinakiewicz
Social Impact Bonds (SIB) and Pay-for-Success (PFS) financing structures have generated considerable “buzz”. In part, this is about the promise PFS and SIB have for changing the way we think about the funding of social programs. SIB and PFS have the potential to provide supplemental, sustainable private capital to fund social programs that work. As government at all levels continues to cut budgets for social programs, the potential for a new source of capital is alluring, and who can argue with the wisdom of funding what works?
Once launched, the success of a PFS or SIB rests squarely on the performance of service providers. They must deliver programs that achieve the positive social outcome metrics specified in contracts with governmental payers in order to release payments to private investors. If service providers fail to hit these metrics, there are predictable consequences. Individuals, families and communities involved in the programs fail to receive promised improvements. Private investors incur losses. Reputations suffer.
It’s surprising then that the public dialog on PFS and SIB to date has focused so little on engaging service providers. Contrast this with the extensive analysis of the incentives and requirements for engaging governments and private investors that has dominated the public dialog during this same time. Certainly, engaging government and private investors is necessary for launching PFS and SIB in the U.S. However, given the key role service providers will play in successful execution, a comparable focus on their capacity requirements and readiness issues is required for PFS and SIB to take root in the U.S. with meaningful systemic impact.
Service providers require a more engaged and influential presence in this public dialog in order for PFS and SIB to be implemented with systemic impact in the U.S. The field needs to identify the opportunities, challenges, risks and capacity requirements that will enable a broad pool of service providers to participate in PFS and SIB. Opportunities for incubation should be developed to prepare the service provider community to be PFS and SIB ready, even if they never actually participate in one.
The reason for this is that the truly disruptive aspect of PFS and SIB is the potential they have to change the way we think about how social programs are delivered. PFS and SIB promise to accelerate an inexorable shift in the social sector from a focus on “outputs” to a focus on “outcomes” in defining and measuring the success of service providers and the programs they deliver to society’s most vulnerable individuals, families and communities. With the possibility of PFS and SIB, the days of the focus on “outputs” (we served 500 individuals in our recidivism reduction program) are numbered. The days of a focus on “outcomes” (we reduced recidivism by 15% among individuals involved in our program) have arrived.
This is not as radical as it may seem. Persistent budget pressures are compelling governments and philanthropies to deliver more measurable positive outcomes for every dollar they “invest” in social programs just to maintain current levels of impact, especially given the magnitude to which need has increased. When allocating funds and evaluating programs, government and philanthropies in increasing numbers are already requiring service providers to set and meet outcome metric targets.
All of this presents an opportunity for the social sector to build an enabling environment to support the identification, growth and proliferation of high-performing service providers that deliver programs that work. First, let’s continue disciplined due diligence to find service providers who are ready now to participate in PFS and SIB. Nothing will galvanize the movement toward outcomes and what works in the sector more than successful proof-of-concept PFS and SIB transactions. Second, invest also in the incubation of PFS and SIB capacities and expertise among service providers who are not yet ready. Preparing a pipeline of service providers ready for PFS and SIB is needed both to reach the critical mass required for PFS and SIB to have meaningful systemic impact and to equip providers for the pervasive focus on outcomes that is all too certain to come.
I’m glad someone is noticing that the non profit community needs to be engaged in the dialogue on SIBs and impact investing. The few comments I’ve seen on various blogs have focused on concerns about measuring outcomes–“we know what we do is good but its hard to measure.” But it seems like the dialogue on SIBS is happening amid a very different community than those who work in the trenches. I don’t think they are attending impact investing forums, or looking at social entrepreneurs as allies. The nonprofit service providers are most often community members who are focused on making a difference in their communities. In the Latino and African American community, these service providers are under enormous pressure now given the economic climate that exists. Those of us working on creating the infrastructure for a social impact bond should not assume we can just show up and sell the idea. Nonprofit leaders need to feel they were in this dialogue from the very beginning and we must extend the invitation for them to engage early.
Maria – I could not agree with you more as to the critical importance as to the engagement of Social Entrepreneurs. and the traditional not for profit world supporting innovation and collaboration in this space
But as a statement of fact the Social Impact Bond was conceptualised whilst I was working at Ashoka and then taken up by Social Investment Bank in the UK – (Note the SIBs acknowledgements document) Then subsequently coming back over the pond to the US two years later. This is in addition to the legal structure to scale the SIB to the Social Entrepreneurs and collaborative partners – the L3C in the US and the SELLP in the UK – both funded in part by the Robert Wood Johnson Foundation – so to be historically correct social entrepreneurs and one visionary Foundation has been involved in this process since conception.
Arthur – We undoubtedly owe a great deal to the pioneering work on Social Impact Bonds done in the UK by these and other organizations, among them the Rockefeller Foundation, the Young Foundation, Social Finance and several others. I’ve commented on occasion that, with one notable exception, the Social Impact Bond is really not a revolutionary innovation , but rather a innovative way of linking together a number of approaches and structures that the social sector had already been using and/or experimenting with. That notable and brilliant exception of SIB was monetizing social impact through the mechanism of recoverable cash savings that are produced by prevention and early intervention and triggered by realizing outcome-based performance metrics. This is the mechanism that opened up the potential for PFS and SIB to provide a meaningful, supplemental private financing source for social programs that work. It also put a bright shining light on the transformative possibilities of shifting the focus of service delivery in the social sector from outputs to outcomes. This transformative potential is why I believe that engaging service providers in the public dialog on PFS and SIB and incubating PFS and SIB capabilities as broadly as is possible in the service provider community is so important.
Maria – I’m particularly struck by the points you make in the last two sentences, and I strongly endorse both positions. Extending the invitation to the broad community of service providers to engage in the public dialog on Social Impact Bonds and build the capacity to
Maria – Sorry for the misfire on the partial comment earlier. As I was saying….I’m particularly struck by the points you make in the last two sentences. I strongly endorse both positions, as they take due recognition of a basic fact – service providers are where “the rubber meets the road” in the success of Pay-for-Success and Social Impact Bond execution. If you’re interested in some of the efforts underway to engage service providers, you might want to check out our Social Impact Bond Learning Hub website at payforsuccess.org and nffsib.org. Among other information on the topic of Social Impact Bonds and Pay-for-Success financings, there is a July 28th webinar you can replay in which a panel of service providers and community intermediaries discuss their perspectives on Social Impact Bonds. There is also a section of the website called the “Provider Toolkit” that can be helpful in answering questions service providers who are interested in PFS and SIB may have.
Great article & comments.
Bill & co.regarding the service providers in the SIB and PFS models, would you see this space being filled exclusively by non-profits (Maria, this seems to be your experience from your insightful post), or can there be for-profit service providers as well? It would seem that if there was a mix of both, the pool of qualified providers would be greater.
I imagine a challenge would be to determine the level of payment to for-profit service providers, in light of the fact that I assume the lion’s share of financial payment from the government agencies, provided the pre-determined outcome metrics are met, would go to the investors.
Tom – Yes, conceptually, for-profit organizations could provide services in a PFS or SIB structure, so long as they meet the PFS and SIB execution requirements, including the proven ability to meet challenging, date-certain outcome-based performance targets. These are the same qualifying criteria that apply to nonprofits. In fact, the dialog on PFS and SIB acknowledges the possibility of for-profit providers. Your mention of the economics involved is an interesting point. At the most basic level, the economics of PFS and SIB work when they meet certain conditions: (i) the cost of delivering the preventative or early intervention services through the PFS or SIB for a targeted social issue and population is meaningfully less than the cost of existing, governmentally-funded back-end treatment protocols for that same issue and population, (ii) this cost differential, i.e., savings, can be recovered in cash and (iii) these cash savings are sufficient to pay private investors a return, while, ideally, allowing the government payer to retain a portion. So, all other things being equal (which they never are), a for-profit and not-for-profit provider could be equally qualified to participate in a particular PFS or SIB, but one might be preferred over the other based on relative delivery costs. Unfortunately, the real life calculus that would be involved is much more complicated and nuanced than this. In the final analysis, both for-profit and not-for-profit providers in the social sector will need to prepare for the inexorable shift from outputs to outcomes, and it’s hard to see much in the way of downside for the social sector to have both types of organizations in the qualified pool of potential PFS and SIB participants.