Yale School of Management

Program on Social Enterprise

Harnessing business skills and markets to achieve social objectives.

Outcomes-Based Financing: The Mechanics of an Innovative Financing Vehicle

How can Outcomes-Based Financing scale its complex model and reinvent how governments pay for social services? These were the central questions of Social Impact Lab guest speaker, Andrea Phillips, Co-Founder of Maycomb Capital, an innovative impact investing platform.

Maycomb’s flagship program is the Community Outcomes Fund, a $50 million fund that invests in human services initiatives. The Fund takes on the investor role in multi-stakeholder deals, providing working capital for a service provider tackling an important social service, such as early childhood education. Crucially, this upfront funding allows the provider to scale its programs, working towards agreed upon, measurable goals. These outcomes, which are carefully tracked by a third-party evaluator, can be directly tied to cost-savings for a local government (most commonly at the state or county level). If outcomes are met, the government pays back the investor with interest. (This short video from the Nonprofit Finance Fund gives a good overview of the Outcomes-Based Financing, or “Pay-for-Success,” model.)

Why embark on such a complicated transaction? Phillips pointed to a staggering statistic: despite over $800 billion of government annual expenditures on human services, less than 1% is backed by “even the most basic evidence.” It was this insight that led Phillips to quit her job as head of the Urban Investment group at Goldman Sachs (where she launched the first social impact bond in the United States) and found Maycomb Capital. She refers to Outcomes-Based Financing as “the point of the spear” in changing how government pays for social services. With the keen lens of a social entrepreneur, Phillips foresaw an outstanding opportunity for a new market and real impact.

The trajectory of Outcomes-Based Financing in the United States has not been one of straight-line growth or universal acclaim. Projects have been slowed down by factors such as overly bespoke design of metrics and designing interventions with many moving parts that are hard to replicate. Maycomb’s strategy is to address these obstacles, both in its own funds and in order to provide models for the field at large.

Essentially, the Fund does everything it can to standardize these transactions, reducing complexity and increasing efficiency. This can be done at many stages, from focusing on the kinds of interventions that best lend themselves to this type of financing mechanism (such as early child education and workforce development) to using a fund structure to avoid the costs of mobilizing investors for each new transaction.

Perhaps Phillips’ most controversial opinion was on evaluation design: is the most rigorous form of evaluation, the randomized control trial (or RCT), the most appropriate for these kinds of initiatives? Phillips pointed out two reasons why they may not make sense. The first is simple: high costs and added complexity. The second is more nuanced: with this kind of experimental design, real-time information on project success is less readily available. By contrast, other methods can instead prioritize capturing real-time data and using it to drive continuous program improvements. For Phillips, ongoing technical assistance and collaboration with service providers have been essential for successful projects.

As someone who is likely entering public service upon graduation, I felt a strong alignment with Phillips’ underlying mission—to revolutionize the way that governments pay for social services. With her clear vision and measured approach to tackling a complex problem, Phillips’ is a powerful voice in the Outcomes-Based Financing movement.

By Ben Selden MBA 2021