The UK is engaged in an ambitious experiment to shift funding across a range of public programs – everything from welfare-to-work to youth services and offender rehabilitation – to focus on real-world results. Naturally, debates are springing up around this concept. Pay for success (alternatively called payment by results) connects buyers of social outcomes – typically governments, foundations, international development institutions and corporate philanthropists – to solution providers, allowing buyers to shift from traditional contracts and grants to rewarding specific outcomes. As with all prizes and challenges, this approach attracts new providers, new approaches, and radically new business models.
“Currently, the boundaries within which public service providers can innovate are quite narrow,” says Tom Gash of the Institute for Government. “Payment by results enables new business models to emerge.” In this way, rewarding success represents an important stage in the creation of functioning markets for social outcomes.
A pay for success system transcends territorial departments and allows providers to scrap experiments swiftly if they prove ineffective. Early failures along the way can even be advantageous, if they lead to improved results before the clock times out. Pay for success is not just an innovation; it’s an innovation multiplier that creates incentives for creative solutions.
Pay for success is not a new concept. Previously, however, it was beset by countless challenges: the need for objective measures; the time needed to achieve results; the correlation of an organisation’s specific role to the overall result; and so on. In a dozen ongoing pilots, the UK is systematically trying to overcome each of these challenges.
Take metrics, for example. Governments traditionally spend money reactively, not preventatively. Crime prevention is much trickier than punishment. Consider rehabilitating prisoners; negative pressures from fellow criminals must be overcome with positive support, from personalised vocational training to the maintenance of constructive relationships beyond the prison walls.
Adjusting prison programs and conditions by legislative decree can produce knots of red tape, and some experiments may prove ineffective. With pay for success schemes, governments can allow providers (non-profit organisations, contractors, social entrepreneurs) to master the details and shoulder the risks.
The UK government is rewarding contractors on specific metrics, such as the requirement that Serco reduces by five per cent the reoffending rate of prisoners who go through the prison it operates in Doncaster. Conditional payment of this kind offers a compelling stimulus for the provider to align its goals with those of government.
Creating such metrics presents one of the biggest challenges for pay for success schemes. The exchanges must avoid creating perverse incentives and avoid tactics such as ‘cream-skimming’ (serving the best applicants while neglecting less promising candidates). Contracts must set achievable goals that account for nationwide trends such as economic recession.
Shared interest in meeting the objective
Pay for success provides entrepreneurs, private companies, non-profits and social enterprises with a strong incentive to team up, creating a shared, vested interest in meeting the objective. A diverse cast of contributors can produce new, innovative approaches.
Antonia Romero, of the Ministry of Justice, expects pay for success schemes to spur further innovations, such as HMP Doncaster’s ‘Daddy Day Care’ programme, which allows fathers to see their children. “Keeping the family unit together is a key driver in reducing recidivism,” she says. “Things that might be considered to be soft stuff actually work in reducing reoffending. The great thing about alternative providers is they often have more freedom to do things like that.”
This article is adapted from William D Eggers and Paul Macmillan's new book, ‘The Solution Revolution: How Business, Government, and Social Enterprises are Teaming up to Solve Society’s Toughest Problems’ (Harvard). Their ongoing book tour next arrives in Washington SC on 5 December