By Ashley Kasprzak, JVA Consulting
After watching a live webcast from the White House last week about the Pay for Success: Investing in What Works model, a line from folk singer Doug Burr’s Graniteville is flowing through my mind: Wake up, baby, there’s a train a-comin’. In this case, the “baby” is the nonprofit sector; in particular those organizations that currently receive federal and state grants.
Pay for Success, a.k.a. Performance Bonds, is a new way that innovators are thinking about supporting social good. Rather than the competitive grant process that we are used to, federal and state grants would be taken up a notch with the onus for increased accountability placed on service providers. One of the webcast speakers mentioned that for the first time in the Pay for Success model, there is a simple algorithm that is generating a lot of excitement—positive social outcomes = economic value. An economic value can be measured as a return on investment.
When I think about the recent trends of limited funding for tremendous community need, grantors’ interest in solid evaluations and the increased number of grant applicants, it seems like a natural evolution to make the granting process more competitive in order to have better results. It’s about improving the way government funding is invested in social projects.
Both nonprofit organizations and government funders will agree that there are high stakes involved with so many people in need. Whether it’s food, shelter, education, clean water or job training, the government wants to send taxpayer dollars to projects that work. During the webcast, one of the presenters said:
Randomized control studies are so expensive and so the government doesn’t do it as often as it should. In a way that leaves us flying blind. On the other hand, if we did it for everything, we would grind to a halt.
An alternative to highly rigorous evaluation projects is to place more accountability on service providers. Within a Pay for Success model, it seems that grantees will be required to set clear outcomes (not new) and get reimbursed in part or full when those outcomes are met (definitely new). Negotiation may become a part of grantmaking. If a grantee must have money upfront to launch the program, the government agency may decide to release funds for that purpose, but if outcomes are not met, then the grantee could be required to pay the agency back for its investment. A speaker said,
We may see this [Pay for Success] take off in the next four to five years. Right, now this mechanism for financing social programs is an experiment. We are trying to break some of the past rules of government. We have to find some way to get better results for the money we are spending.
In studying this model, questions arise for me about who absorbs the risk and if the government and nonprofits can share the risk. Keep your eyes open and ears to the ground, it seems likely that the Pay for Success train may soon make its way to every part of government grantmaking. I encourage you to read more from the Nonprofit Finance Fund and contribute to how Pay for Success is designed in the future.