I was in a meeting the other day with a group of high powered people who are relatively new to impact investing, and the topic of Social Impact Bonds (more and more often being referred to as Pay for Success or Pay for Performance contracts) came up, as it often does with this type of folks. If you are reading this, you know what I'm talking about, but just in case, SIBs or PFP contracts are ones where a non-profit or for profit venture enters into a contract with government to provide a set of services that will save the government money later. The group bears the up front cost of providing the service and, based on how they perform against a predetermined metric, the government pays them a portion of the savings. The better they do against that metric, the more the government has saved and the more the organization is paid. The classic example is services for recent parolees. A group raises money from investors to provide counseling and job placement for recent parolees, and after a year (or two), the government pays the group based on how much lower their parolees’ recidivism rate is than a control group.
It's a powerful idea and one of those concepts that lead high powered people to ask "Why isn't this happening all over the place already." I'm bullish long term on the idea and I'll probably blog about it more in the future. It funds innovation and the sorts of preventative programs that are often the first to have their budgets cut. It takes the short term funding burden and risk of failure off government since they only pay for demonstrated savings. And, theoretically, it will make huge pools of capital available to service organization that can prove their efficacy, but the devil for now is in the details. For a successful program, you must have:
This brings us to Campbell’s Law, which states:
"The more any quantitative social indicator (or even some qualitative indicator) is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor."
Simply put, the higher the stakes are around a single measure of progress, the more likely that groups will try to game the system (or commit outright fraud) an the less useful that measure will be for determining whether or not you are actually accomplishing your goals. The most recent prominent example is outright fraud in Atlanta around high stakes testing, but more broadly you could argue that, as testing becomes the single measure of educational achievement, it crowds out all the other educational outcomes that we were hoping to use testing as a proxy for. Pay for test results, get a generation of optimized test takers (or worse yet, a bunch of cheaters).
Campbell’s Law doesn’t doom SIBs or Pay for Success to failure by any means, but it is something to keep in mind for those designing programs and those considering investing. As we are building these new systems, we need an evolving apparatus that helps us to reward what works without having the measurement tail wag the programmatic dog.
Patrick Maloney lives in Portland, OR where he helps nice people working on cool stuff. He tries to limit his blogging to things about which he knows something.