I have been following the growth and development of pay-for-success (PFS) initiatives for a number of years (for more that coverage, check out Two New Tactics For Non-Profit Funding and Social Impact Bond Initiatives Move Ahead). And a couple of weeks ago, our team covered what I see as a “big leap forward” for this model – Third Sector Selects Seven Awardees Considering Child-Focused Pay-For-Success Initiatives. On March 11, 2015, Third Sector announced it had selected seven PFS projects proposed by six state or local governments, and four non-profit organizations, focused on child and youth development.
Even though it will be some time before we know the success of individual projects – over the next 12 months the seven participating jurisdictions will complete feasibility studies for their projects – it speaks volumes for the growth of this movement (for some other uses of PFS, check out U.S. Department Of Education, Section 736: Pay For Success and U.S. Department of Labor, What is Pay for Success?). And as all payers move to link payment to value (for more on that, see my colleague Monica E. Oss’ presentation, The Shifting Path To Successful Organizational Performance, from the 2015 OPEN MINDS Performance Management Institute), a number of specific questions come to mind that executive teams should ask themselves:
- Is my organizations’ executive team and board of directors prepared to engage in the delivery of services where reimbursement is dependent on outcomes?
- Am I confident that my organization’s services will produce measurable gains?
- Are the financial management systems in my organization up for the task of tying together budgets, reimbursement, and performance measurement?
- Does my organization have the financial reserves for contracts that pay later (or not at all) depending on performance?
- Does my organization have the capital and the talent to “scale up” services to the larger populations required in PFS agreements?
Executive teams should explore these questions – and honestly answer them. Last year, I had the opportunity to moderate a session at the 2014 OPEN MINDS Planning & Innovation Institute, Social Impact Bonds: The Rising Influence Of Pay-For-Success Contracting On Non-Profit Funding, featuring Bill Pinakiewicz, Vice President, Eastern Region of the Nonprofit Finance Fund. Bill has had hands on experience across the U.S. with social impact bonds. In his presentation, he outlined what they look for in organizations for PFS contracts:
- A history, system, and culture for using outcome metrics to evaluate preventative program performance.
- A multi-year track record of success in setting and achieving challenging outcome metric targets.
- Business models and executives with collaborative service delivery capacity and experience.
- Institutional capacity for feasibility studies and to support scaling up and time horizon requirements of PFS.
- Multi-year planning, budgeting, and execution expertise to manage upfront PFS capital.
- Board support for PFS business model capacity demands, resource commitment, and risk.
I think this is a tall order for many child-serving organizations. For a closer look at the contract terms of a PFS arrangements, check out Pay For Success Contracting Among The Commonwealth of Massachusetts, Roca, Inc. And Youth Services, Inc. For further information on PFS, join me at the 2015 OPEN MINDS Strategy & Innovation Institute on June 17, where I will facilitate another great PFS session – An Update On Pay-For-Success Contracting & Social Impact Bonds; Lessons Learned From Executives Who Are Making It Work.