After Pay for Success: Doubling Down on What Works (SSIR)

By Sam Schaeffer, Jeff Shumway, & Caitlin Reimers Brumme Aug. 20, 2015

It’s time to start talking about what governments will do when pay for success (PFS) projects that are funding social services end. While only a handful of projects are currently in progress across the United States, a robust pipeline could result in several more launching over the next year. Many will feel like pilots, as government, providers, intermediaries and investors are still gaining familiarity with this new contracting mechanism. Immediate challenges will likely center around setting up referral pipelines, designing evaluation methodologies, and making necessary mid-course project corrections. While for these early projects, the first evaluation results may be years away, we should not put off the conversation about what happens after the last participant in a project receives services. We need to keep discussion about program sustainability front and center.

If a project doesn’t show any improvement over the status quo, PFS provides government with rigorously measured results and a sunset to the project (exemplified by recent news on the first PFS project at Rikers Island, which found no reduction in recidivism so was ended). This is unlike government programs that fund identical services year-after-year regardless of impact and a success in itself, a win for taxpayers and society. However, when a PFS project does demonstrate impact, there are important questions about how to sustain service delivery post-financing. One option is “refinancing,” where government renews the PFS contract with new investment to continue or further grow the intervention. This could be a sensible path for smaller deals that providers and government want to take to scale with second round of investment. Another logical next step for successful projects could be to establish a new performance-based contract with government to provide services at scale in an ongoing way. 

Advancing “the Achievement Compact”

Over the coming year, field-building investments by organizations like the Harvard Social Impact Bond Technical Assistance Lab, the James Irvine Foundation, and the Corporation for National and Community Service will yield many new PFS projects in issue areas such as early childhood education, special education, juvenile justice, and homelessness. These projects will seek to produce significant social good in the next 5-10 years and, by using rigorous evaluation methodologies, they will be able to prove it. 

However, ultimately the PFS field should aim to have long-term effect on government contracting behavior—shifting procurement toward evidence-based interventions and adopting a sustained focus on measuring impact. If PFS projects are successful in delivering public sector value and producing social impact, they should create more than an incentive—indeed, truly an obligation—for government to expand investments in these interventions, and in the performance management and measurement that helps them succeed. Projects that have demonstrated success could move from a PFS contracting design financed by outside investors to performance-based contracting in which government pays directly for results. 

Ideally, each new PFS project would contain an "achievement compact”—a statement of intent from government to integrate successful services, providers, and performance-based funding mechanisms into ongoing funding streams or new funding streams to support them (see below). Procurement rules and a lack of long-term appropriation authority may limit the specific commitments governments can make. This should not stop government, however, from expressing its intent to double down on what works. 

New York State Senator Daniel Squadron has been a champion of using evidence to inform government funding decisions and believes PFS projects should chart a future course for how government funds social-sector innovations: "Pay for success exists because too often government needs a push to innovate. When that innovation works, we should double-down, not move on. Proven programs that have already paid for themselves and improved lives are exactly where government must invest. An achievement compact can give service providers confidence that government will stick with programs that work and push government to do what we should do anyway."

Transitioning to Performance-Based Contracts

Advancing this compact will be one challenge; designing effective performance-based contracts for the field of human and social services will be another. Many providers already have such contracts, and they carry their own sets of advantages and risks. Providers need contracts that offer enough working capital to run services and eliminate any perverse performance incentives. Government will also need to select performance metrics that projects can achieve over a relatively short time. It is not politically practical to wait 15 years to see if an early childhood intervention results in college matriculation. Determining near-term outcomes that predict long-term impact requires strong evidence, and may require additional evaluation and research. Finally, our own PFS experience has shown that strong collaboration with government improves program performance. Ensuring that government is not merely a passive consumer of services, but rather an active collaborator in performance management and measurement will be equally important. 

Below are a set of policy recommendations that can help us work toward institutionalizing this compact—and setting up effective performance-based contracts—to change how government contracts for services.

Federal Government

  • The Office of Management and Budget (OMB) should require that government applicants to federal PFS solicitations detail sustainability plans for successful PFS projects. Ideally, they would agree to the achievement compact or articulate their own vision for achieving sustainability.

  • OMB should investigate how, on a federal level, it can provide preferred federal contracting status to successful projects supported by federal PFS investments. Additionally, it could create a federal schedule of “proven” interventions that federal and state agencies, as well as cities and counties, can purchase directly to achieve specified outcomes. 

State Governments

  • Similarly, states could provide preferred contracting status to those with PFS or other performance-based funding experience.
  • States should require that relevant agencies and/or divisions of budget report on the success of the projects, and explain opportunities and limitations to achieving longer-term project sustainability. When shared with a legislature, this could help create enthusiasm for continuing projects post-PFS. 

  • States should create commissions or other mechanisms to monitor active PFS projects in their state. Commissions should include executive and legislative membership, as well as representation from the provider, intermediary, and evaluation communities. States should charge these commissions with sharing data and lessons from PFS projects, building coalitions and public engagement, and actively working for the uptake and sustainable funding of successful projects. 

Philanthropic Sector

  • A significant amount of investment in PFS transactions comes from philanthropy, and the field is uniquely positioned to push for deals that contain the achievement compact. Philanthropic organizations should indicate to all levels of government that the compact is an important part of any transaction they are investing in.

  • The sector should fund technical assistance for government to help design performance-based contracts that will limit the financial exposure of providers, and ensure that governments are paying for impact and that service providers are delivering services effectively. 

  • To support these performance-based contracts, philanthropy can help build the government’s capacity for ongoing performance management—the hallmark of all successful programs. This includes ongoing data collection, analysis, and course correction after a provider begins delivering services.   

Evaluation and Evaluators

  • Government needs results in hand before it can make informed future funding decisions. Too frequently, funding ends years before evaluators can complete assessments that require long-term follow-up. When possible, government should structure PFS projects so that evaluators provide early evidence to guide funding decisions before funding ends. 

These recommendations reflect the multiple stakeholders who are necessary to both actualize a PFS project, and sustain it financially and programmatically. PFS projects take big teams to pull off, and lots and lots of time and money. To date, there has been strong agreement that the investment is worth it. That’s because the payoff is so big: PFS provides an opportunity for government to pay for what works, while giving best-in-class providers the opportunity to deliver evidence-based programs. This is a unique opportunity to change the way government supports social services. If we don’t chart a path to sustainability for PFS initiatives now, successful projects will not have the lasting impact on the social sector we seek. 

Sam Schaeffer is executive director and chief executive officer at the Center for Employment Opportunities (CEO).

Jeff Shumway is vice president advisory services at Social Finance.

Caitlin Reimers Brumme is director at Social Finance.