Imagine your employer paying you a full year’s salary based on your first week of work. It may sound crazy, but this is exactly what has happened in the social services sector for decades. Social sector organizations often get paid in advance for work they have promised to do. As a result, the incentive to ensure they are delivering true results can become secondary to compliance with grant reporting requirements.
This is the kind of problem Andrea Phillips, founder and CEO of Maycomb Capital, is trying to address. Phillips, who previously served as a Vice President of the Urban Investment Group at Goldman Sachs and worked on the first social impact bonds in the United States, spoke at Social Impact Lab in April 2019 about the work her firm has been doing to disrupt and improve public sector funding.
“Pay-for-success,” also known as outcomes-based financing, has gained popularity in the last decade as a way to increase the impact of philanthropic and public financing, and there is ample opportunity for its continued growth. Phillips shared that of the estimated $300 billion to $1 trillion of annual social services financing, less than one percent shows demonstrated evidence of impact. “The right financing at the right time accelerates impact in communities,” argued Phillips.
Maycomb’s Community Outcomes Fund is the largest fund in the United States solely dedicated to outcomes financing. The Fund is raising $50 to $75 million to deploy into 10 to 12 outcomes financing transactions around the country over the next three years. The Fund works with service providers that have a proven history of achieving results and targets communities where local government officials and other key stakeholders are highly engaged and aligned with the impact objectives.
Paying for success makes a lot of sense, but how do you make the financing work? After all, paying for outcomes is not without its drawbacks. It would present key working capital challenges if service providers were not to receive payment until after they have demonstrated outcomes from their programs. What happens, for example, if they deliver services, but those services do not result in the desired outcomes? Most service providers cannot take on such risks.
Phillips’ firm helps take on this risk to advance outcomes-based financing. For example, one organization Maycomb Capital works with provides English language and employment services to refugees in order to increase refugees’ income and help them earn college-level credits. The organization is contracted by a state government and receives a loan from Maycomb for the working capital they need to fulfill the program. Once the organization proves they have increased participant incomes and educational credits, the state government pays the organization for their services, and the organization is able to repay the loan to Maycomb Capital.
This funding approach could change how both government and philanthropy deal with innovation. “Philanthropy should be coming in like angel investors to fund innovative projects that could change broken and underperforming systems,” Phillips argued. At present, however, philanthropy is not set up well to fund innovation. Often, funders only pay out grants or contracts once an organization proves they have spent the money. This approach, in turn, incentivizes unnecessary spending.
Phillips recognizes that outcomes-based financing is not the right tool for all types of projects. It is well-suited to scale interventions with a proven model, like certain early childhood and workforce development programs, but doesn’t work so well to test early-stage innovations without evidence of success, such as criminal justice reform.
Ultimately, there is still a ways to go to reach the full potential of outcomes-based financing. “The market is really early – we’re addressing friction points and headwinds now,” Phillips noted. But she is optimistic that it has the potential to change philanthropic and public sector funding for good.
By Elizabeth Davidson, MBA ’20