Randy Shumway: Improving social impact by paying for success (Deseret News)

By Randy Shumway

Editor's note: This column was previously published in a newsletter produced by Zions Bank.

Utah has recently received national attention for its pioneering efforts to bring innovation to public sector services. In October, Salt Lake County and United Way of Salt Lake announced encouraging preliminary results for the country’s second Pay for Success project — an effort to improve pre-kindergarten learning for at-risk children while simultaneously reducing associated costs.

Taxpayers and philanthropic donors alike sincerely hope their contributions will be effective in solving complex social issues such as addiction, recidivism and homelessness. Yet decades of significant investment aimed toward solving social problems have been marked by frequent disappointment, in part because they track — if they measure at all — activities rather than outcomes. For example, a program intended to improve education among the poor might focus on increasing the number of students taught rather than the amount students ultimately learn, much less how that learning affects their opportunities or success in life. Activities matter, but lasting outcomes are the ultimate objective.

The innovative Pay for Success concept currently being tested around the country enables social programs to focus their funding on measuring and achieving enduring results. Under this model, private investors provide the capital necessary to scale high-impact programs delivered by private providers. Independent evaluators measure progress against predefined goals. If the outcomes are met, the government pays investors the balance of their investment plus a bonus. If the independent evaluator determines the predefined goals were not met, the government doesn’t pay a dime.

Despite its potential, the practice of Pay for Success in social programs is still in its infancy. The first-ever Pay for Success project was designed to keep inmates at New York’s infamous Rikers Island from returning to jail upon their release. As part of the program, an evaluator tracked outcomes to determine whether the program’s implementation drove meaningful results, with government obligated to pay only if the program was successful. Unfortunately, the program didn’t ultimately achieve its desired results in reducing recidivism among Rikers Island inmates. However, the substantial silver lining is that we now have a better understanding of what does and doesn’t work for this issue — insights taxpayers didn’t have to pay for.

The second Pay for Success social impact initiative occurred in Utah. It was led by Salt Lake County and United Way of Salt Lake in partnership with private investors Goldman Sachs and the JB Pritzker Foundation. The project funded high-quality preschool for 110 toddlers who were at risk of needing expensive special education in kindergarten and beyond. Initial results released last month found that only one of the 110 children ultimately required special education. Even if the program helped only half of those children avoid special education services, it saved hundreds of thousands of taxpayer dollars.

Subsequently, The New York Times accurately questioned the robustness of the program’s assessments and suggested the success of the Pay for Success initiative may have been unintentionally inflated. While it’s appropriate to examine the measurement methodology of these types of projects, the newspaper’s investigation missed the most critical point: An innovative and disruptive approach is being tested in uniquely different locations and settings around the country in an effort to improve return-on-investment of taxpayer dollars and to elevate the lasting efficacy of social efforts. The fact that government agencies, nonprofit organizations and private investors are neck-deep in discussions about real outcomes and specific measurement strategies is virtually unprecedented. Pay for Success gives traction to government funding, channeling scarce resources to activities that deliver real outcomes.

Any pioneering effort will experience bumps at its inception. But when that effort prioritizes results and incentivizes improvement, such impediments are only failures if we let them derail positive disruption altogether. In the case of Utah’s first Pay for Success project, we’re learning some important lessons about what it takes for everyone to win. As we continue to learn, Pay for Success will help governments eliminate wasteful spending by funding only programs that produce results while investors profit by giving back to society. Of course, the best part is that society will benefit without bearing the risk or breaking the bank.

Randy Shumway is the CEO of the Cicero Group and is the economic adviser to Zions Bank.