Why Pay for Success? Start with Government Procurement (Third Sector Capital Partners)

By Tim Pennell and Joe Gayeski

Pay for Success (PFS) is often spoken about in terms of finance. Many within the PFS field describe the cross-sector contracting model as a new, innovative way to finance social services for vulnerable people. While funders are important to PFS for several reasons, the model is not, at its core, a financial tool. Rather, PFS is an opportunity to improve government accountability and transparency by changing the way government contracts for social services.

Procurement is, admittedly, a wonky term. Many Americans are unaware that local and state governments routinely contract local, community-based nonprofits to deliver social services in a number of issue areas, including poverty, child welfare, recidivism, homelessness, and wellness. To understand PFS and its benefits, it is important to understand government procurement.

What is government procurement?

Government procurement, also called public procurement or public purchasing, is the contracting of external providers to deliver goods or services on behalf of the public interest. Instead of providing goods or services itself, a government uses taxpayer dollars to pay for a third party to deliver services. According to a 2015 OECD Report, procurement contracts amount to roughly a quarter of total U.S. government expenditure. Over 60% of these contracts are issued at the state or local levels, amounting to an estimated total annual spend of over $2 trillion dollars.

A portion of these contracts fund nonprofit organizations who deliver services to communities in need. For example, a state seeking to address homelessness can contract with service providers to support permanent supportive housing, drop-in centers, and emergency shelters for homeless individuals.

How are nonprofit organizations paid via traditional procurement?

Traditional government procurement contracts make payments to nonprofit organizations based on program outputs – number of people served or compliance with contract requirements. However, these traditional procurement contracts rarely measure the impact of the programs they fund. Compliance requirements may measure what the program does, but leave little evidence of what the program achieves. In the homelessness example, are the programs receiving state funds successful in improving housing opportunities for homeless individuals?

Investigations into contracts using this contracting model are less than promising. In a 2010 study of 10 government-backed social programs, only one program was found to have “positive effects” when evaluated through a randomized control trial (RCT). Despite the billions of government dollars spent on procured social services, there has been limited evidence that these funds have made a measurable impact on the issues they were contracted to address.

How can these contracts improve?

The National Association for State Procurement Officials (NASPO), a professional organization that includes all 50 state purchasing offices, named “Measuring Performance” a top ten priority for 2016. By introducing data collection, analysis, and other performance measures into procurement contracts, state and local governments can more accurately measure the impact of the programs they fund.

PFS is one innovative way to introduce such performance measures into government contracting. PFS contracts pay for social services not on the basis of outputs, but on the basis of rigorously measured outcomes. For example, rather than funding for the operational costs for homelessness interventions, PFS contracts would instead make payment to service providers based on outcomes of each individual permanently housed. This performance-based contracting ensures governments can measure the impact of the programs they fund, and most importantly, use that information to direct funding to programs that demonstrate success.

Moving towards a Performance-Based Social Sector

Third Sector’s three launched projects are demonstrating the impact that PFS can have for communities in need. The contracts from our projects in Cuyahoga CountySanta Clara County, andMassachusetts are publically available to demonstrate their unique approach to government procurement. As contracts like these gain traction in the US, the American social sector is likely to become driven by performance, rather than limited by compliance. This will mean more effective, efficient, and robust services for our most vulnerable communities.

As the field of PFS contracting attracts attention, practitioners like Third Sector Capital Partners, Inc. are incorporating the lessons learned from early projects. Bringing contract language into alignment with existing procurement features can help speed the project construction process, while reducing the necessary upfront funding can help the model scale throughout the United States.

Santa Clara County’s Project Welcome Home achieves both. While the project incorporates an RCT for evaluation, payment is released for the duration of an individuals stay in housing, a key indicator associated with improved health and well-being for individuals served. This simplifies the contracting process, while also providing robust evidence in support of permanent supportive housing programs.

Tim Pennell, Director, and Joe Gayeski, Analyst, work from Third Sector's Boston office.