Pay-for-Success Is Gaining Momentum, Study Finds (Chronicle of Philanthropy)

By Megan O’Neil

The inaugural round of grants from the federally funded pay-for-success program is already spurring growth of performance-based contracting nationwide, according to a recently published report.

"It is a little like throwing a match on some dry kindling," said Patrick Lester, director of the Social Innovation Research Center and the report's author.

In October, the program, administered by the Corporation for National and Community Service, announced $12-million for eight grant recipients. They included the Harvard Kennedy School Social Impact Bond Technical Assistance Lab, Third Sector Capital Partners, and the Corporation for Supportive Housing. The grantees play a critical intermediary role in performance-based contracting, identifying communities in need and making subgrants to government agencies and direct service providers.

The pay-for-success model shifts the risk in funding social programs to private investors, who pay into a fund to support a project. If that project meets its goals, the government administering the grant will repay the investors’ money. In some cases, the government will pay the investors a profit for projects that exceed expectations.

An independent review of the pay-for-success grants conducted by the Social Innovation Research Center found that they are poised to spur 100 new pay-for-success contracts, as Social Innovation Fund officials had promised. Last year, there was just one pay-for-success project delivering services in the United States, the report says, citing the Harvard Kennedy School Social Impact Bond Technical Assistance Lab.

What's more, the federal funds are driving new collaborators to the table, the report says, including private investors, state and local governments, and nonprofits.

Established intermediary organizations like Third Sector Capital are "being joined by newer intermediaries, many of which are tightly focused on specific program areas and possess substantial programmatic expertise and related contacts," according to the report.

The report was not funded by an outside organization or individual, Mr. Lester said, and his organization is not affiliated with the Social Innovation Fund.

Even as the pay-for-success model gained attention in the nonprofit world this year, there are plenty of skeptics and even more unanswered questions.

Ultimately, its long-term success depends on the performance of early projects, Mr. Lester said. If results are good, and existing dollars are redirected to other pay-for-success efforts, performance-based contracts could gain serious traction.

"On the other hand, it could be an example where there is a lot of enthusiasm," but the results are comparable to existing programs, Mr. Lester said. In that case, he added, pay-for-success contracts would likely fade away.