Trends in Social Financing: Pay for Success

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What if there was a way to grow successful nonprofit programs, improve the lives of the less fortunate, and save taxpayer money all at the same time? That’s exactly what the Pay for Success model aims to do.

Our recent research on Austin’s nonprofit community confirms what we’ve all suspected: nonprofits are struggling to meet an ever-growing demand for services. Nonprofit leaders see long-term sustainability as both a challenge and a priority, and are exploring new financing and business models, with Pay for Success being a compelling new option.

Pay for Success (sometimes called social impact bonds) is a financing method that is becoming increasingly popular, and is now being explored as a solution for Austin organizations.

How does Pay for Success work?

The Pay for Success model can get complicated quickly, so here’s a basic look at how it works. Let’s say a nonprofit has a program that they can prove decreases the number of pre-term births among the low-income population they serve. They have measurable outcomes and data to prove it, too. In order to find a funder to help grow their program, they first think about who ultimately benefits from a reduction in pre-term births. Of course the families involved benefit, but the local hospital district also benefits since a baby born at term reduces the strain on an already overburdened healthcare system.

Proven and measurable outcomes, as well as clear cost savings, make this program a candidate for Pay for Success. The key here is that there is a quantifiable savings to a payer (in this example, a hospital district). The program may get funded by the hospital district, which agrees to pay a certain amount only if the desired outcomes are achieved. Essentially, they pay if the program is successful in a measurable way.

The crucial difference with a Pay for Success arrangement is that the government is “purchasing” the outcome rather than the output. With a traditional contract, the government may pay a service provider for each mother who goes through an intervention (an output). With Pay for Success, they would pay for each mother who gives birth to a healthy child instead of a pre-term child (an outcome).

How do nonprofits get the funds in the first place?

This raises an obvious question: If the payer is buying results after they’ve been delivered, where does the nonprofit get the initial funds to scale their service? This is where a private investor comes into play. Private investors provide the upfront capital to grow the program with the expectation that they will get their money back once the outcomes are delivered. This arrangement is often facilitated by an independent intermediary who coordinates payments, hires auditors, and certifies outcomes.

What Pay for Success initiatives been implemented in Austin?

Along with United Way for Greater Austin, Austin/Travis County Health and Human Services Department, Travis County, and Central Health we have been selected to participate in a Pay for Success feasibility study over the next year to see if this model is right for our community. We’re proud to be a part of this local partnership, and are committed to bringing more social innovation and creative financing models to the mission-driven organizations in Central Texas. Solving our region’s most complex problems will take unprecedented cross-sector collaboration and greater investments in high-performing solutions. This project is a perfect example of both.

How does my nonprofit get involved with Pay for Success?

Pay for Success is a very specific method of financing that isn’t appropriate for all organizations. If you have a program that has proven, measurable outcomes that deliver a demonstrable benefit to society, and there’s a funder you think would be willing to purchase these outcomes, then there’s a possibility that your organization could one day benefit from a Pay for Success arrangement.

The best thing you can do right now is begin to foster a culture of evaluation at your organization. Constantly think about your outcomes, how best to achieve them, and how to prove them. The Institute for Child Success has a great summary of current Pay for Success projects in the United States. The Nonprofit Finance Fund hosts the Pay for Success Learning Hub. Be sure to see their “Rapid Suitability Questionnaires” to help you evaluate if Pay for Success could be right for you.

Our 2013 research study on evaluation practices in Central Texas found that only half of area nonprofits report that they regularly collect data on program outcomes. If you’re interested in improving your evaluation and measurement practices, read more on our evaluation services, and if you’re a member, check out free evaluation resources in the 501(c)ommunity.

And don’t miss the panel at this year’s Mission Driven titled Pay for Success: The Promise & Challenge of Creative Financing featuring renowned experts Maggie Moore, Vice President in the Urban Investment Group at Goldman Sachs; Karla Sainz, Public Accountability Manager at The Arnold Foundation; and Nirav Shah, Director at Social Finance.


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