Nonprofits Enter New Era of "Pay for Success"

As demand for vital social services for vulnerable communities increases, and funding for these services decreases, we must find more cost-effective ways to address critical needs.
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As demand for vital social services for vulnerable communities increases, and funding for these services decreases, we must find more cost-effective ways to address critical needs. Even more important is the need to deliver these services through programs that provide more and better results for each dollar invested in them. By results, I mean meaningful and measurable positive outcomes for the individuals, families and communities of need that these programs are designed to serve.

In the U.S., Social Impact Bonds and, more broadly, other "Pay for Success" financing mechanisms are taking root. Pay for Success is gaining recognition as a potentially effective, replicable and scalable approach for attracting capital to finance social programs that deliver verifiable evidence of promised positive outcomes for the populations they serve and do so at reduced costs through an emphasis on prevention and early intervention.

Until recently, most of the focus on Pay for Success in the U.S. has been on adapting the financing mechanism of the Social Impact Bond as it was first launched in the UK, to fit the contractual, regulatory, legislative, budgetary, political and cultural requirements of the U.S. The results of this financial engineering have been both impressive and well-documented, and include Pay for Success pilots in California, Massachusetts, Minnesota, New York and Utah.

With a growing number of state and local governments and private funders on board, we now must turn renewed attention to the service providers on the front lines in outcomes-based financings. Even beyond the Pay for Success pilots already underway, these service providers -- most of them nonprofits -- need to adapt to an environment that increasingly ties access to capital for social programs directly to results, not work completed. As a result, nonprofits face a growing need to change the ways they structure, deliver and evaluate their progams, and this, in turn requires like changes in the way they fundraise, budget, hire, track and report results and more.

Across the country, we're seeing the first signs that nonprofits are actively preparing themselves to access capital from Pay for Success opportunities and more generally, to operate in the new age of outcomes-based funding. Increasingly, both private investors and governments are supporting these efforts.

Of particular note are the following. Salt Lake City, Utah announced an early childhood education pilot Pay-for-Success transaction to reduce the future need for special education services. One of the private investors in the transaction also made a sizable, additional investment to build the capacity of an early childhood education provider and launch an online hub for early childhood education best practices. The 2014 budget proposed by the Obama administration includes over $500 million in funding to support Pay-for-Success pilot financing projects for social programs sponsored by state and local governments. In June of this year, the Harvard Kennedy School announced its Social Impact Bond Technical Assistance Lab capacity-building program for six governments -- Colorado/Denver, Connecticut, Illinois, New York, Ohio, and South Carolina -- to develop Pay-for-Success contracts for Social Impact Bond financings to support promising outcomes-driven social programs in these locations.

Just this month, Nonprofit Finance Fund announced the launch of a series of boot camps to incubate and accelerate investment readiness and capacity for PFS among service providers. The "incubators" for Chicago, Connecticut, North Carolina and South Carolina are designed for selected nonprofit service providers in those locations to build the capacities necessary for successful service delivery and access to capital in an outcomes-driven world. The "accelerators" for Dallas and Santa Clara will more specifically build the capacity of selected nonprofit service providers in those locations to participate in a Social Impact Bond or other Pay-for-Success outcomes-driven financing approach.

What we are now observing with increasing optimism and enthusiasm is greater emphasis on actions to improve the capacity of service providers and governments to meet their mission and program obligations to individuals, families and communities of need through a focus on outcomes and evidence. Of course, thoughtful financial engineering is required to effectively and sufficiently connect capital to service providers that deliver positive outcomes to vulnerable populations. But financial engineering is not the goal or objective of Pay-for-Success or other outcomes-based approaches. The real opportunity is new, stable funding for high-impact, evidence-based programs.

Helping nonprofits succeed in this new environment is essential. At a time when we are hard pressed to find capital to efficiently and sufficiently finance effective social programs, we are compelled to consult the north star -- positive outcomes for people in need -- and orient our work accordingly.

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