May 15, 2011

Obama’s 'Pay for Success’ Plan Deserves a Try

Sean Stannard-Stockton

With all the talk of a government shutdown and cuts in 2011 spending that would hurt nonprofits, a proposal in President Obama’s 2012 federal budget to revolutionize how the government spends money on social services has not attracted nearly as much attention as it deserves.

An idea he calls “pay for success” should be embraced by politicians from both sides of the aisle who want to see better results from social programs and more efficient use of government funds.

The proposal would provide government money to social-service groups that achieve good results.

Instead of receiving payments upfront, organizations would get government support based on the results they actually achieve.

In the interim, foundations, donors, and even private investors would provide money to run the programs.

If the programs produced results, according to an independent evaluation, the donors could get their money back and possibly more than that if the results were better than expected.

So not only does the idea help government avoid the risk of trying out programs that might not work but it also gives both foundations and government agencies a greater incentive to focus on financing what works.

Today, most federal programs simply hire nonprofits to provide a service, such as getting poor kids ready for kindergarten or providing job-skills training to people who want to get off welfare.

The results of such programs are rarely assessed, but those that have been assessed don’t always produce such great results.

To be sure, “performance based” government contracts have existed for a while.

But never before have these contracts been linked to a financing system that would allow donors or investors to provide initial support with the potential to recapture the money they put into a social-service program and even earn a financial return on their money.

In this time of gaping government budget deficits, this idea is especially attractive because it helps allocate government money to proven solutions.

It also has the potential to cut spending. For instance, if a program is found to do a great job of providing job-skills training for the poor, it could reduce spending on welfare programs over time.

For people in philanthropy, “pay for success” provides a new investment option, one in which the financial return depends directly on achieving social results.

Tying investments to social results has become a popular concept in philanthropy in recent years.

However, for most of these investments, the level of the financial return does not directly depend on the level of social results.

The “pay for success” model, on the other hand, creates a contract that specifies the rate of return based on the level of proven social results.

The “pay for success” approach opens the door to using market-rate investment capital as well as philanthropic support to finance innovative social programs that produce better results at a lower cost to taxpayers.

But at its heart, “pay for success” is not just a financing or cost-savings program. Its success hinges on whether nonprofits are able to deliver results that are superior to current government programs.

The “pay for success” idea will not be appropriate for all social services. For the approach to work, government agencies and nonprofits must be able to track the results of the program.

In areas like school readiness or employment services, the government is already collecting much of the data needed to determine the level of program success. But for many causes, the results will be difficult to track.

If Congress agrees to give “pay for success” a try, the efforts should focus on nonprofit programs that have already undergone rigorous evaluation to prove their effectiveness and that have positive program results that would produce significant cost savings to the government.

The government is by far the largest financial backer of nonprofit services. If more of its money focused on rewarding the groups with the best results, we might witness a dramatic leap forward in solving the nation’s biggest problems while reducing spending on programs that don’t work.


Sean Stannard-Stockton is chief executive of Tactical Philanthropy Advisors, in Burlingame, Calif., and author of the Tactical Philanthropy blog. He is a regular columnist for The Chronicle of Philanthropy.