According to the RFR, Massachusetts will be exploring Pay for Success contracts in two social issues: chronic homelessness and juvenile justice. This statement represents a welcome shift in the way we approach social impact in two significant ways. First, it orients service providers towards understanding that in a particular social issue, it is a type of program model based on best practices that drives real change, not an individual organization. Second, focusing on common issues will allow the agreement between government and nonprofits working in that social issue area to use common indicators and common terminology related to outcomes. We at Root Cause, call this information alignment because focusing on an approach that works starts to align the terminology of all groups striving towards outcomes in that area. If we do not start calling the social issues by the same name – and realize that not individual organizations, but rather programs based on best practices produce a measureable outcome, how will we ever agree on what high performance is?  We were also pleased to see chronic homelessness selected in the RFR, as it is one of the eight social issue reports we have produced. It is also an area where we believe there is a great deal of evidence of what approach works effectively.

Another aspect of the RFR I really liked was that it does not assume a need for intermediaries to implement Pay for Success contracts. Instead it looks to intermediaries as a potential supplementary to support the initial Pay for Success contracts model if needed.  While I applaud the efforts of Social Finance, and am incredibly impressed by their laser focus on making sure this idea is successful, it is good to see an alternative experiment where government and nonprofit programs try to negotiate the terms of agreements without an intermediary. A huge concern in using the Social Impact Bond model was that it involved large levels of additional resources to even set up the payment structure. Thus, the absence of an intermediary might help the model be more scalable in an already resource-strapped environment.

Thus, with the RFR milestone comes a larger hill that we still have to climb: reallocating current government funds to social programs engaging in the pay for success model, without raising additional money from outside sources in a time of austerity. It will not be easy to renegotiate the terms of the billions of dollars being spent currently and to reallocate this money to programs in chronic homelessness and juvenile justice that engage in new Pay for Success contracts. However, if we are truly going to make progress, we need to head towards a performance-based allocation of resources. The announcement this past week is a step in the right direction. I am hoping we will now see more experiments that don’t just rely on increasing philanthropy, but instead focus on the assessment of how current government funds are being allocated to programs across different social issues.

Illustration: Shannon May

A Social Impact Bond or a Pay-for-Success bond is an investment model where the government enters into a contracting position with an intermediary that raises private funds to finance the operations of nonprofits driving social impact. It is at this intersection where performance measurement becomes relevant. The government will pay the investment back with returns ONLY if the nonprofit in question delivers the pre-defined objectives (as judged by an independent evaluator). Therefore the government’s biggest incentives in engaging in this model are the limited liability it takes on and the fact that no tax dollars are wasted on programs that don’t generate government savings. Thus, the government is accelerating the adoption of new approaches while shifting the burden of risk on to private investors. As Jeff mentioned in the panel, this system also builds “evaluation into the DNA” of the government because funding can now be directed to those organizations that have proven to be successful.

On the other hand, philanthropy through SIBs is taking the form of a private sector instrument because these bonds are now seen as investments, with a tax treatment that is no longer under charitable contribution. In this model it is private philanthropists who are the investors providing funds to finance the operations of collaborating nonprofits and who can expect to see real capital gain or loss depending on the performance of the nonprofit. What do these returns look like? According to Tracy, although it’s too early in the US model to be able to throw out a concrete number, the UK recidivism model saw returns in the range of 2 – 13% net IRR after recidivism was lowered to a certain pre-defined threshold. As expected, the investors were mostly philanthropically motivated private foundations using a portfolio outside its grant-making corpus.

In simplest terms, the SIB or “pay for success” model rewards proven innovations while simultaneously allowing investors to get more social impact out of every dollar. However, the discussion raised a few clarifying questions and potential caveats about the implementation of this model. For example, what kind of nonprofit organizations are suitable to use this tool and what challenges will they face? Additionally, given how much resources will be required for the implementation is this the best way to utilize our already limited resources?

In talking to Jeff and Tracy about how SIBs will impact nonprofits, I understood that the organization ideal to work within this model will have an organizational structure with proven success, experience with measuring impact and the ability to scale. However more importantly, the SIB model would require not one single nonprofit but rather a network of nonprofits providing a multitude services.  For example in the UK SIB model working to reduce recidivism, there was a team of NGOs providing a range of services starting from finding jobs for the prisoners to working with their families. The objective is not to provide one service better but to stabilize lives, which in turn requires collaboration.  Therefore, this is not an easy model to pilot, let alone scale.

Additionally, Jeff noted that SIBs are not ideal for services with a high cost-benefit ratio. This model is not the right way to fund a majority of social services and is instead more suitable for services where the benefit-cost ratio is 2 and that deliver a high return on investments while having outcomes that are measurable. Finally, these programs should also be supplementary to a larger program or have safeguards against failure so that there would be no huge impact if the program fails.

The SIB model presents certain challenges to nonprofits themselves. Lisa from My Life My Choice raised the question of validity in impact assessment and performance measurement. With the amount of ambiguity shrouding the progress in social impact, who decides which results are valid and what do good outcomes look like for organizations like MLMC? Furthermore, since the effectiveness of the SIB model depends on the amount of government savings the proven nonprofit can generate, there needs to be better definition as to how existing efficiencies are being recaptured. Using the example of Medicaid, Joe Finn from the Massachusetts Housing and Shelter Alliance asked when a program is proven to have created certain efficiencies, how willing were people going to be to provide a financial return to philanthropic investors and how much?

Another growing concern among nonprofits is whether the SIB would cannibalize current grant making activities and further limit the already scarce resources available and where does the idea of reduced risk becomes reduced responsibility on the part of the government? Tracy responded by saying that both foundations and individuals are looking at SIBs as investments. Positive returns on SIBs will constitute long-term capital gain and is a different tax treatment from a charitable deduction. Hence, SIBs are no longer a segment of philanthropy and belong to a different source of money. In fact from the evidence gathered from the UK model, it seems that foundations have been leveraging a pool of money that is outside the grant portfolio; thus introducing a new pathway for NGOs to access capital to fund and scale their work while generating future recoverable government savings.

Given all this, I wondered whether this was a good allocation of resources to get government in a better contracting position with nonprofits? The answer, so far, is yes – because the incentives are in the right places. Firstly, it provides an incentive to government to allocate social service dollars through performance measurement checks with minimal risk. Secondly, it creates an incentive for organizations to measure outcomes because in a few years there will be evidence that program evaluation can in fact attract significant funding.  Lastly, it creates an incentive for private investors to allocate their resources and now receive a nominal return.

SIB’s are creating conversations between government and nonprofits that in the past have been difficult to get going.  Despite the uphill battle to get SIB’s off the ground, this tool has many positive implications beyond just the goal of doing more with less.

Illustration: Shannon May

Over the past few years, Root Cause’s Social Impact Research department, with support from the William and Flora Hewlett Foundation, has developed a methodology for identifying high-performing organizations that takes knowledge of what the proven approaches are for a targeted social issue as its starting point. Through the development of social issue reports covering a wide array of issues—from school readiness to childhood obesity prevention to workforce development with opportunities for advancement for adults facing multiple barriers to employment—we have seen increasing evidence of the benefits of starting with an understanding of the social issue, specifically what research tells us are the best approaches to make progress on that issue in order to evaluate an organization’s current and future performance.

For example, we recently completed a social issue report for funders interested in the area of school readiness. Our research for this report revealed that the most successful programs follow an approach that includes three core components: an education-based curriculum, support services for parents, and complementary services (e.g., social services, medical health benefits) designed to prevent negative life outcomes for at-risk children. Furthermore, we found that some of the best indicators for evaluating the performance of organizations pursuing such an approach include use of a certified curriculum, assessment tools related to student development, and level of parental involvement.

With such information in hand, it became possible to determine which programs are most effective in realizing their stated goals. In our own analysis of more than 1,700 childcare centers in New York City using publicly available information, we found that only 17 percent met our minimum criteria of being nonprofit, serving at-risk children, and incorporating the three core components of the proven approach. The vast majority were not employing the methods that current data show to be the most effective. What is even more alarming is that in interviews, we were told that organizations that are not using proven approaches could at times actually be having a negative impact on the children they serve.

Such information about proven approaches also provides a rigorous framework for evaluating the potential of early-stage social innovations to lead to greater progress in addressing a given social issue. It makes it possible to understand how a new approach is positioning itself to fill in current gaps or to outpace current best practices.

The enormous potential of a social issue-based approach to evaluating programs is illustrated by the information revolution that took place in the private sector during the twentieth century. One of the innovations that increased transparency at the time was the development of an independent financial research industry. Reports, conferences, and advice began to be offered by the likes of the Yankee Group, Forrester, and Gartner Research. That information, in turn, provided investors with the insights they needed to make informed investment decisions and greatly increased the amount of growth capital available to technology companies, both young and established.

If we are to significantly improve our nation’s capacity to address social problems, we need to ensure that our resources are going to the approaches that will likely demonstrate the best results – and to the innovations that have the greatest potential to make further advances. Only by starting with an understanding of the social issue and the best approaches to address those issues can we accomplish this.

The Social Innovation Fund could set in motion a similar information revolution within the nonprofit sector by requiring intermediaries this year to use information about proven approaches as a guide for how they make investments. The information about specific social issues could be broadly shared with funders and nonprofits alike to catalyze the revolution.

Why am I (and lots of other people) so excited about the i3 Fund? Jim Shelton, formerly of the Gates foundation and now the deputy assistant secretary for innovation and improvement in the DOE, is overseeing the Fund – and he totally gets it. The guidelines for the fund show he has a deep appreciation of the fact that there is a need to understand and invest in innovation while simultaneously keeping a sharp focus on spreading solutions that work based on results.

The fund takes a similar approach to the social impact measurement spectrum I recently wrote about in my post on randomized control trials (RCT). The fund offers three levels of award categories: up to $5 million (“development”), up to $30 million (“validation”), and up to $50 million (“scale-up”). Each level of investment has its own set of guidelines in terms of progress on the innovation and the type of measurement required. As you might expect, as the level of investment increases, so too do the requirements and expectations for measurement and evaluation become more demanding – but not until the level of a “scale-up” award does the DOE demand RCT-type evaluation. Hopefully the i3 Fund will prove to be a great test case for how government can reward success, spread solutions, mobilize its systems, and influence others in government for how to partner with innovators on the ground.

By the way, the public has been given the opportunity to comment on the priorities laid out in the Federal Register here. If you have feedback, you must submit your comments by 11:59pm on Monday, November 9. To submit a comment, click here – and don’t forget to check the box that says “Comment directly on NOTICES: Investing in Innovation (Document ID ED-2009-OII-0012-0001).”

Photo by Chicago 2016 Photos via flickr

When I did a web search for volunteer firefighting, I got thousands of websites including volunteerfd.org, the ‘top volunteer firefighting resource.’ I also found this amazing statistic: according to the National Volunteer Fire Council, 73 percent of firefighters in the United States are volunteers. This is, to me, a perfect example of a social innovation that has spread and become a core part of a town’s model to perform a community service. Volunteer fire departments are terrific public-private partnerships based not on one specific organizational model, but on an innovative approach that can and has been adapted in countless communities across the country. It saves the tax payers money, utilizes volunteers in the community, and provides a critical community service. We can learn a lot from how volunteer fire departments have leveraged volunteers and spread and adapted a model for distinct community needs.