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Pay for Success and the Importance of Investment

February 8, 2016 | Robert Montgomery

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Pay for Success (PFS) is a creative way for governments to attract the immense funding that is necessary for large-scale problem solving. Complex social issues are plaguing communities all across the United States, and it has become harder for local governments to find adequate resources to combat declining social tribulations. Negative statistics for issues like high rates of crime, homelessness, and chronic disease are getting worse while funding to fight those problems is diminishing.

Pay for Success (PFS) is a creative way for governments to attract the immense funding that is necessary for large-scale problem solving. Complex social issues are plaguing communities all across the United States, and it has become harder for local governments to find adequate resources to combat declining social tribulations. Negative statistics for issues like high rates of crime, homelessness, and chronic disease are getting worse while funding to fight those problems is diminishing. Service providers in many of these communities have developed innovative programs that are proving to be effective at making measurable progress toward solving some of these problems. But as most of these providers are nonprofits, they are limited in the size and scope of their programs and are unable to properly address the problems.

In order for PFS to work, government entities, service providers, evaluators, and funders need to work together throughout the entire process. Targeted outcomes must be established and agreed upon through a legal contract. More than likely, that contract is going to be multi-year and include a provision where the government entity commits to payments to the funders in the event that targeted outcomes are achieved by the service providers. The outcome measurement is conducted by evaluators whose data collection and evaluation is key in determining the “success” of the program as well as the size of the payments back to funders.

In a nutshell, PFS uses private funding to solve social problems. Before the process can begin, one (or all) of the members of the partnership must take on the monumental task of raising sufficient private capital to run the project, as well as for project evaluation. It is of extreme importance that the “fundraising entity” pitch some form of service delivery proposal to potential qualified investors (such as individuals, corporations, foundations, and either for-profit or nonprofit entities) and raise enough money to fund the entire strategy. By design, the PFS financing model is unrestrictive as to the type of qualified organizations and individuals that are allowed to invest in a promising intervention strategy.

No matter how successful or effective the program, if the fundraising effort is not able to attract the necessary dollars to bring the program to scale, the entire PFS process would be null and void. But because of its potential community impact and aggregate cost savings, PFS programs are very attractive both to capital-market funders who are merely looking to maximize return on investments and to philanthropic and mission-led donors who are looking to maximize impact on the community.