August 12, 2013; Federal Reserve Bank of San Francisco


According to the White House, Pay for Success is an “innovative way of partnering with philanthropic and private sector investors to create incentives for service providers to deliver better outcomes at lower cost—producing the highest return on taxpayer investments. The concept is simple: pay providers after they have demonstrated success, not based on the promise of success.” In 2012, the White House budgeted up to $100 million to fund Pay for Success initiatives in program areas that included workforce development, education, juvenile justice, and care of children with disabilities.

The benefits of Pay for Success are numerously stated, as highlighted recently by the Nonprofit Finance Fund’s Pay for Success Learning Hub. It’s a program that can leverage private capital, monetize social impact/outcomes of social services, realize costs savings for government, and connect performance outcomes to financial return. What are not as widely stated are the potential pitfalls of Pay for Success, which were highlighted recently in a blog post from the Federal Reserve Bank of San Francisco. It outlined a couple of issue areas, including the following two:

  • The Challenge of Data Collection. While the sector has been moving strongly toward data-driven results for a number of years, the ability for many organizations to obtain credible data from secure collection methods is very difficult. According to the blog post, “all parties in PFS contracts stand to gain or lose based on ‘what the data show.’ Community impact may be difficult to accurately measure, however, undermining the legitimacy of the contract and inviting potential litigation. The community data house must be in order before PFS contracts can be adopted widely.”
  • Government May Not Be Ready. Government has been contracting with the nonprofit sector for decades and both sides have established strong process norms on working together. Pay for Success is a model that completely runs counter to this decades-long relationship. According to the post, Pay for Success “upends the existing social service procurement process. Government officials need to be ready to manage PFS contracts and prepared to meet their obligations when their terms are met. Agencies, staff, and budget processes will all need to change to accommodate them.”

The blog author, Ian Galloway, who also edited a recent Community Development Investment Review edition on Pay for Success, stated, “Pay for Success is not a panacea. Nevertheless, it offers an attractive alternative to the status quo of paying for programs instead of results.” Let’s hope that the system change needed in government and the sector can accommodate the excitement and promise of the Pay for Success program.—John Brothers