The Chronicle of Philanthropy

WITH ALL THE TALK of a government shut- down 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 inde-
pendent evaluation, the donors
could get their money
back and possibly more
than that if the results
were better than ex-
pected.

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.

In this time of gaping government budget deficits, this idea is especially attractive.

sults 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 collect-
ing much of the data needed to
determine the level of program
success. But for many causes,
the results will be difficult to
track.

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.

PETER YORK

Charities May Wind Up Paying for President’s ‘Pay for Success’ Idea

PRESIDENT OBAMA’S budget proposal for 2012 includes a $100-million idea that could revolutionize the way social programs are financed—or could put a ticking time bomb next to the heart of some of our society’s most needed social programs.

While the proposal quickly attracted support and excitement from both sides of the political spectrums, nonprofits need to reflect on some of the drawbacks before rushing to sup-

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port the concept. Mr. Obama’s idea is a welcome import from Britain, which is experimenting with what it calls social-impact bonds.

Introduced by the government of Prime Minister David Cameron, the concept is getting a test with inmates released from a prison 75 miles outside London.

Today, 60 percent of those prisoners can expect to land in jail again within a year after their release. But a nonprofit group has raised $8-million to test a social-service program designed to reduce that probability—in part by helping the former prisoners learn how to stay healthy and find work.

The nonprofit is convinced that it can reduce the number of repeat offenders to 7. 5 percent, and if it does, the people who put up the $8-million will get all their money back from the government.

If the charity does better than the goal, and even fewer people return to jail, the donors will get a bonus.

But if the group fails altogether, the money will be essentially a typical charitable donation.

Mr. Obama rebranded the idea as “pay for success” bonds, and his budget plan includes experiments with seven government programs, such as job training and juvenile justice.

After more than a decade’s
work evaluating social pro-
grams, and another decade as
a social worker, I am intrigued
by Mr. Obama’s ideas but also
skeptical.

The main concern will be how to define success; in the real world, it is difficult, if not impossible.

affect the results, and it is often impossible to figure out that just one innovation made all the difference.

What’s more, it’s hard to imagine how “pay for success” programs can be sufficiently insulated from political pressures, so that disputes about measurement standards and acceptable levels of rigor won’t become a political shuttlecock.

Using the British prison pro-
gram as an example, what hap-
pens if some powerful group of
political leaders or activists no
longer accepts the idea of keep-
ing prisoners from crime for
just one year but wants three
years—or five? Or if a 7.5-per-
cent drop in repeat-offender
rates is no longer acceptable
and instead this group desires
10 percent or 20 percent? Or if
not returning to prison is no
longer the desired measure but
instead rates of permanent em-
ployment?

The ideas and motives behind social-impact bonds are worthy, but they won’t succeed unless they take the following into account:

Set realistic goals for any program, and measure only direct results. The further in the future the goal, and the more complex the social problem being solved, the more likely that confounding variables will get in the way.

Expand social-impact bonds incrementally. As they prove themselves, and learn from each success and failure, the idea can grow into a more ambitious effort. It is humbling, and important, to keep in mind that the first test of this idea in the real world is only a few months along.

Get nonprofit workers to share their perspective. The charity workers who will be charged with operating these programs must be closely involved in their design, as well as in devising the measures that will determine their ultimate success.