Beyond social impact bonds

As governments and service providers around the world learn from the early years of Social Impact Bonds, a wider outcomes-based contracting landscape is emerging. Originally published in Pro Bono News.

​If there’s one thing most people in the social sector agree on, it’s that they want to “make a difference”. This underpins the desire to move from a focus on outputs (where we may not have evidence about whether we are making a difference), to a focus on outcomes that matter to the social service user.

Not-for-profit boards are starting to drive an outcomes focus because part of good governance is to know whether the organisation is doing something that works. An ideal social service system ensures all participants are aligned around improving outcomes for those who need it.

Yet, the social service system is still a long way from that goal.

There are plenty of pitfalls in this transition to outcomes: debates about what and how to measure; costs of data collection; worries about unintended consequences and cherry picking; and the political hurdles in shifting resources to prevention. Yet while difficult, these are technical problems that can be solved with good outcomes-based contract design and a collaborative, co-design approach with government.

We recently attended the ICS (Institute for Child Success) Pay for Success Conference in North Carolina – a conference to support outcomes-based learning with a focus on early childhood disadvantage. We heard from an early intervention project successfully preventing at-risk kids from requiring costly special education services at school. We heard of the shift of $100 million of social service spending to an outcomes basis in the state of Rhode Island. We learned about a project that prevents hospitalisations of high risk asthma patients through allergen removal in the home – saving lives and money. These are some of the dozens of projects in operation now that are based around outcomes.

While there are many confusing terms in this new space, our preferred term is outcomes-based contracting (OBC) – a contract for funding preventative services of high social impact where some of the funding is dependent on achievement of agreed outcomes (results-based payments) verified by an independent evaluator. A Social Impact Bond (SIB) is one type of outcomes-based contract.  

The key characteristics of these contracts are:

• outcomes that matter to the end user are central – and provide a rallying focus for all parties;
• prevention focus – based on early prevention of a problem and leading to avoided costs for government in the long term; savings which can be shared with those who provide upfront working capital for the intervention;
• evidence-based interventions of proven effectiveness, with strong reliance on good integrated data;
• reduced up front risk for funders where external investors are involved;
• accountability and incentive for delivering results – leading to innovative solutions to project barriers; and
• flexibility and co-design with government allowing application to many different problems.
• Clear themes emerged from our visit and from our discussions with some of the leading US organisations in the field, Third Sector Capital, NonProfit Finance Fund, Brookings Institution and Social Finance (US).

Here are three themes:

A shift from SIB to a range of outcomes-based contracting approaches

Many of the outcomes-based contracts in the first few years have been in the form of Social Impact Bonds (or Social Benefit Bonds) “SIBs”. The challenge is that SIBs involve not only the complexity of designing an intervention and financial/risk-sharing model, but also the raising of investment capital as part of that risk sharing. This means they take time. Some people may also have concerns about raising funds from investors for social services. What we saw in the US was that, as governments learn how to commission for outcomes, they are becoming more efficient at the process. For example, contracts are being standardised after an initial period of experimentation. Some contracts don’t require third party investors, but might simply provide a bonus payment to the social organisation for achieving outcomes. Outcomes-based “Rate Cards” are also being used (also happening in NSW) when the costs of delivering a set of clear outcomes are known to the commissioner and the social sector. Alternative financial models are being developed that share risks between impact investors, government, service providers and philanthropists.

The upshot is that the tools and methods to develop effective outcomes-based contracts are maturing, and a variety of mechanisms can now be used beyond just a SIB.

Need to support governments and social organisations to shift funding to outcomes-basis

The Harvard Government Performance Lab has been supporting cities and states across the US to shift from an inputs or outputs-based funding system to one focused on outcomes. They have found that the shift needs to start with the clever design of RFTs and contract terms.

However, it also requires ongoing “active contract management” where the funding and funded parties get together in structured sessions to collaborate on data, problem-solving and joint working towards successful outcomes under the contracts. Our view is that this approach can be applied to any commissioner of services, from federal, state or local governments and agencies, but also philanthropic funders.

New roles for philanthropy

While the philanthropic sector in the US is quite different to Australia, the ideal of shifting to an outcomes-based philanthropy is just as valid. Philanthropists and impact investors can play an important role in reducing risk and providing part of a “stack” of investment in outcomes-based contracts that require upfront investment such as Social Impact Bonds. They can also move to co-design outcomes-based philanthropic grants and investments for the organisations and projects they support. This might mean providing bonus grants based on an organisation’s achievement of agreed outcomes.

In the US, the federal government, through its US$352 million (A$472 million) Social Innovation Fund, and philanthropic trusts have supported the development of the outcomes-based ecosystem by funding intermediaries to conduct feasibility studies and support early stage outcomes projects. The investment is then highly leveraged if a project gets approved by a government outcomes funder.

While Social Impact Bonds may continue to provide value, there is also a need to develop a wider array of outcomes-based contracts. There is no question Australia can benefit from more focus on capability and ecosystem development around a broader outcomes-based social system.