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The blurring lines between government, nonprofit and for-profit sectors have led to innovative vehicles to fund interventions that address society’s most intractable problems. Social impact bonds (SIBs), also known as pay for success programs, are not actually bonds. They are a way for the private sector to finance social interventions with an acute focus on achieving results. The Vera Institute (2015) offers this definition of social impact bonds: “In a social impact bond, private investors fund an intervention through an intermediary organization—and the government repays the funder only if the program achieves certain goals, which are specified at the outset of the initiative and assessed by an independent evaluator.”
There are less than 40 known SIBs across the globe (Gustaffson-Wright et al, 2016). Despite this small sample size and lack of evidence for success, the concept has captivated politicians and Wall Street alike. In June 2016 a bipartisan bill passed the House of Representatives to allocate $300 million for state and local SIBs over ten years (Wallace, 2015). Several prominent corporate entities, like Goldman Sachs, have launched SIBs as part of their corporate social responsibility campaigns. These finance models rely upon nonprofits to deliver their programs, yet there is a dearth of guidance for nonprofit leaders to understand the opportunities – and risks – they represent.
In July 2015, two of the earliest SIBs in the US reported markedly different results from which a nonprofit manager can learn. The Rikers Island State Prison SIB, which had a goal of reducing recidivism among youths detained, reported after two years that it would cease operations after failing to meet benchmarks. Meanwhile, SIB advocates across the country rejoiced when Salt Lake City’s pre-K pay for success program announced it was able to pay back its investors.
Pay for success programs elicit passionate reactions from all sectors. They are at once hailed as the silver bullet needed to solve society’s so-called “wicked problems” while criticized as new dressing for traditional burdensome contracts. As Clara Miller (2015), president of the H. B. Heron Foundation, points out, versions of SIBs have existed for decades. They are an evolution of the traditional contract partnerships between nonprofits and government. According to Smith and Lipsky (1993), contracting with nonprofits became government’s preferred method of service delivery as early as the 1960s. These early case studies in pay for success programs, along with existing nonprofit management literature, can empower nonprofits to successfully negotiate their stake in this new territory.
Nonprofit managers ought to consider how a SIB might affect their evaluation, program management and fundraising efforts. They must also develop their understanding of the deeper implications SIBs have for the nonprofit sector in order to emerge as leaders in the pay for success design process.
Evaluation is the most critical component of any SIB, and for good reason: it is extremely labor intensive, and the entire model hinges on appropriately designed and executed evaluation mechanisms. A nonprofit must be crystal clear about who will bear the brunt of evaluation tasks with a pay for success contract. One reason for Salt Lake City’s success was that its local United Way, a primary architect of the contract, served as the lead in collecting and analyzing data from service providers (Grossman and Lombard, 2015). If the SIB is structured with a lead organization dedicated to data collection and evaluation, a nonprofit manager needs to understand what will be expected of her team. If there is no lead, a nonprofit should be ready to add capacity or shift existing roles to compensate for new obligations.
Program Management in this context refers to the risk a nonprofit is willing to take to scale a program within the bounds of a pay for success contract. Scaling a social service is a complex, non-linear process, and thus a SIB needs to be designed with that in mind (Gustaffson-Wright et al, 2016). Entering into a rigorous, time-intensive pay for success contract is likely a better plan if a program is not brand new. The Rikers Island pay for success program was rooted in evidence-based research, but had never been operated by the service provider in as complex a setting as the New York City prison (MDRC, 2015).
Fundraising is the primary draw for service providers to SIBs, which are often assumed to be brand new funding. In reality, they may be a new brand for existing funding. A nonprofit leader needs to pay attention in the event that previously available grants a program depends on are being transformed into SIBs (Gustaffson-Wright, et al, 2016). What’s more, if pursuing a social impact bond, a nonprofit ought to ensure it has the capacity to manage the requirements of the contract while continuing to seek additional sources of revenue. In other words, leaders should be sure the person(s) managing the evaluation and reporting is not the same person(s) charged with garnering new revenue sources for a program (Lu, 2016).
More leadership from service providers is needed in the design of pay for success contracts. While the day-to-day grind of managing an organization can keep one’s focus insular, this is a space where nonprofit leaders’ voices are especially needed. Smith and Lipsky (1993) warned that contracting with government for service delivery limits, rather than enhances, the nonprofit sector’s autonomy. The increased presence of corporate counterparts in contracting could present an even greater threat to the unique value that nonprofits bring to their communities. A leader must consider whether a SIB will allow an organization to scale its program without compromising its ability to operate independently, engage community volunteers, and function as a space for civic engagement.
The recommendations offered here will assist nonprofits in navigating their decision to pursue a SIB. The guidelines will also equip nonprofit leaders with the knowledge they need in order to actively engage their corporate and government partners in conversations about innovative forms of financing social service delivery.
Grossman, A. and Lombard, A. 2015. Business Aligning for Students: The Promise of Collective Impact. Harvard Business Review. Retrieved from http://www.hbs.edu/competitiveness/research/Pages/research-details.aspx?....
Gustaffson-Wright, E., Gardiner, S., and Putcha, V. July 2015. The Potential and Limitations of Impact Bonds: Lessons from the First Five Years of Experience Worldwide. Brookings Institution. Retrieved from https://www.brookings.edu/wp-content/uploads/2016/07/Impact-Bondsweb.pdf.
Lu, J. 2016. “The Philanthropic Consequence of Government Grants to Nonproﬁt Organizations: A Meta-Analysis.” Nonprofit Management & Leadership, 26 (4). 381-400. Retrieved from http://onlinelibrary.wiley.com/doi/10.1002/nml.21203/epdf.
MDRC. July 2015. MDRC Statement on the Vera Institute’s Study of the Adolescent Behavioral Learning Experience (ABLE) Program at Rikers Island. Retrieved October 1, 2016, from: http://www.mdrc.org/news/announcement/mdrc-statement-vera-institute-s-st....
Miller, C. (March 19, 2015). Can Social Impact Bonds Really Have Big Impact? The Chronicle of Philanthropy. Retrieved September 1, 2016, from https://www.philanthropy.com/article/Opinion-Can-Social-Impact/228887.
Smith, Steven Rathgeb and Michael Lipsky. 1993. Nonprofit for Hire: The Welfare State in the Age of Contracting. Harvard University Press.
Vera Institute. July 2015. Impact Evaluation of the Adolescent Behavioral Learning Experience (ABLE) Program at Rikers Island: Summary of Findings. Retrieved September 22, 2016, from: http://archive.vera.org/sites/default/files/resources/downloads/adolesce....
Abby Elsener is currently the Assistant Director of Development for Health at ASU, and has spent the majority of her career working for community-based nonprofits and social enterprises in Cape Town, South Africa, Washington, D.C., and Phoenix, Arizona. She is a volunteer on the Young Professionals Council of UMOM New Day Centers. Abby graduated with a Bachelor of Arts in History and Political Science from Furman University in 2009, and earned her Masters of Nonprofit Leadership and Management in December 2016 from Arizona State University. A self-proclaimed aficionado of public radio, hiking, backpacking, and coffee, Abby spends all the free time she has gained since graduation exploring Arizona’s many trails, coffee shops, and breweries.