Response to "The Payoff of Pay-for-Success" (SSIR)

By Mark Hand & Margo Johnson

"The future of PFS,” argue V. Kasturi Rangan and Lisa A. Chase, “lies in aligning with impact-seeking investors, not return-seeking investors.” Should it? Or should Pay-For-Success (PFS) designers continue to make an effort to bring return-seeking capital to the table? Based on the principles of the organizational theory of robust action, we believe efforts should be made to attract return-seeking investors—but only as long as their criteria of success (financial return) doesn’t sideline the success criteria of other actors including governments, service providers, and particularly the end beneficiaries affected by PFS contracts. 

The authors are right to point out that while initial energy for PFS came from its promise to unlock return-seeking capital, in practice it has been impact-focused capital that has allowed contracts to get off the ground. The common explanation for this reassertion of impact capital, and one echoed by Rangan and Chase, is one of incentive alignment: impact-seeking capital often comes with lower return on investment (ROI) expectations, greater sensitivity to political considerations, and an IRS-mandated requirement to stay focused on impact. Return-seeking investors’ incentives, so the argument goes, are simply not aligned in this way. 

But the promise of PFS, in our view, is that it provides a unique space in which actors with wildly different motivations can still come together to achieve success, with success defined different ways to different actors. This is highly unusual, difficult to sustain, and absolutely critical to solving the grand challenges we face today, from climate change to international migration to persistent poverty. To do so, we must engage in what organizational scholars call robust action: establishing spaces where actors with different incentives and points of view can engage one another constructively, over time, and through shared action (participatory architecture); using language that allows actors to interpret what is happening from their own point of view (multivocal inscription); and supporting multiple initiatives exploring solutions in different ways (distributed experimentation). 

How does this apply to PFS? Viewing the question of return-seeking versus impact-seeking capital through the lens of robust action, we suggest that there is another, deeper reason PFS designers are wary of return-seeking capital: not only do such investors’ incentives not align with other actors’ incentives, their logic of success—greater risk-adjusted returns—is so clear, coupled with the inherent and accepted power of money, that it can overwhelm the considerations of other actors. As a result, others’ criteria (such as more responsive government, whole and healthy communities, and the shifting of power to marginalized groups) become subjugated to the logic of the markets. We’ve seen this first-hand in speaking with PFS promoters, as we have explored how to include end beneficiaries in the design and evaluation of contracts. We could include those actors, PFS promoters argue, if only there were enough margin for it; and that is only possible if we can demonstrate that it will positively affect financial returns. Such a position elevates investors’ otherwise legitimate success criteria to the point that it rhetorically delegitimizes other motivations. 

The easiest response to this kind of rhetorical overreach is to push return-seeking investors away from the table. But the lessons of robust action points to the dangers of, and offers an alternative to, this approach. Most obviously, excluding return-seeking investors sacrifices their unique competencies: the capacity to structure contracts, for example. It also cuts off a potential avenue to further investment. And perhaps even more dangerously, by disengaging from actors who self-identify as participants in this conversation, we lose an avenue by which we might identify further and more powerful points of collaboration: new financing mechanisms, perhaps, or challenges to which PFS contracts have not yet been applied. 

Robust action offers another way to bring impact-seeking and return-seeking investors together. First, we must acknowledge explicitly that return-seeking investors’ motivations are different than those of the other stakeholders, but no less legitimate. Second, we must look for ways to begin working together without demanding consensus on a single definition of success; instead, we must work to build language and action that allow each actor to define success according to his own evaluative criteria. Third, we should encourage, rather than restrict, distributed experimentation; doing so in the early days of PFS will create avenues of participation for actors we may not even have identified. The upsides of such an approach are great, and compounding over time. By applying these principles we can continually expand the field of action and ultimately the potential impact of PFS. 

One group that is noticeably absent in PFS discussions is the end beneficiaries of those contracts: the individuals and families who are clients of the services PFS contracts fund. Their absence has a similar impact as would the exclusion of return-seeking investors—the absence of their knowledge and expertise weakens the design of contracts, exposing us to heightened political risk. And the loss of their perspective prevents us from identifying further possibilities for shared action. The voices of beneficiaries have been excluded to date for a number of reasons, most of which boil down to a single argument: it is simply too expensive. We think these voices matter, not just out of a respect for those people, but because the inclusion of their voices—like the inclusion of return-seeking investors’ voices—strengthens our work today and builds our capacity to develop new opportunities that will become clear only as we walk together. Through this expanded inclusion and accountability, PFS can, as Rangan and Chase suggest, become “an important step toward making governments and nonprofits accountable and more effective in serving society's neediest citizens.”

Read the rest of the responses.

Mark Hand is a Venture Partner at UnLtd USA, a city-based fellowship offering funding and support to social entrepreneurs in Austin, Texas. He is also an adjunct assistant professor of Social Entrepreneurship at the RGK Center for Philanthropy and Community Service at the University of Texas at Austin.

Margo Johnson is a social work practitioner in Austin, Texas. She is an alumna of the Nonprofit Portfolio Program of the RGK Center for Philanthropy and Community Service, and most recently has conducted research, program design, and strategic planning with the Hogg Foundation for Mental Health and the Travis County Health and Human Services Research and Planning Division.