Nonprofit Sector

Preparing Nonprofits for Social Impact Bonds

August 31, 2011

Social Impact Bonds (SIB) and Pay-for-Success (PFS) financing structures have generated considerable “buzz”. In part, this is about the promise PFS and SIB have for changing the way we think about the funding of social programs. SIB and PFS have the potential to provide supplemental, sustainable private capital to fund social programs that work. As government at all levels continues to cut budgets for social programs, the potential for a new source of capital is alluring, and who can argue with the wisdom of funding what works?

Once launched, the success of a PFS or SIB rests squarely on the performance of service providers. They must deliver programs that achieve the positive social outcome metrics specified in contracts with governmental payers in order to release payments to private investors. If service providers fail to hit these metrics, there are predictable consequences. Individuals, families and communities involved in the programs fail to receive promised improvements. Private investors incur losses. Reputations suffer.

It’s surprising then that the public dialog on PFS and SIB to date has focused so little on engaging service providers. Contrast this with the extensive analysis of the incentives and requirements for engaging governments and private investors that has dominated the public dialog during this same time. Certainly, engaging government and private investors is necessary for launching PFS and SIB in the U.S. However, given the key role service providers will play in successful execution, a comparable focus on their capacity requirements and readiness issues is required for PFS and SIB to take root in the U.S. with meaningful systemic impact.

Service providers require a more engaged and influential presence in this public dialog in order for PFS and SIB to be implemented with systemic impact in the U.S. The field needs to identify the opportunities, challenges, risks and capacity requirements that will enable a broad pool of service providers to participate in PFS and SIB. Opportunities for incubation should be developed to prepare the service provider community to be PFS and SIB ready, even if they never actually participate in one.

The reason for this is that the truly disruptive aspect of PFS and SIB is the potential they have to change the way we think about how social programs are delivered. PFS and SIB promise to accelerate an inexorable shift in the social sector from a focus on “outputs” to a focus on “outcomes” in defining and measuring the success of service providers and the programs they deliver to society’s most vulnerable individuals, families and communities. With the possibility of PFS and SIB, the days of the focus on “outputs” (we served 500 individuals in our recidivism reduction program) are numbered. The days of a focus on “outcomes” (we reduced recidivism by 15% among individuals involved in our program) have arrived.

This is not as radical as it may seem. Persistent budget pressures are compelling governments and philanthropies to deliver more measurable positive outcomes for every dollar they “invest” in social programs just to maintain current levels of impact, especially given the magnitude to which need has increased. When allocating funds and evaluating programs, government and philanthropies in increasing numbers are already requiring service providers to set and meet outcome metric targets. All of this presents an opportunity for the social sector to build an enabling environment to support the identification, growth and proliferation of high-performing service providers that deliver programs that work. First, let’s continue disciplined due diligence to find service providers who are ready now to participate in PFS and SIB. Nothing will galvanize the movement toward outcomes and what works in the sector more than successful proof-of-concept PFS and SIB transactions. Second, invest also in the incubation of PFS and SIB capacities and expertise among service providers who are not yet ready. Preparing a pipeline of service providers ready for PFS and SIB is needed both to reach the critical mass required for PFS and SIB to have meaningful systemic impact and to equip providers for the pervasive focus on outcomes that is all too certain to come.

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