“Success Bonds” touted as Obama bright idea
An idea that is still being tested is borrowed from the British: “Investors only get their money and a bit of profit back if programs actually produce measurable gains in impact.” The idea sounds good as it embraces concepts that I advocate in Smart Data, Enterprise Performance Optimization Strategy © 2010 Wiley Publishing.
The challenges and risks include: 1) a more precise management approach from the President and government, and 2) more precise language in performance-based contracts, 3) finding qualified contractors willing to bet on a new paradigm when they are milking the current one.
We should teach this to Tenth Graders so that when they are ready to assume responsibility for government in a few years, they will be prepared.
“The best idea in Obama's budget (Hint: It's not a cut)
Complaints about President Barack Obama's budget continue, not the least of which are concerns about defense spending, Social Security and the failure of both parties to engage in meaningful progress on health-care costs.
But there are good ideas in the details, including the president's proposal for $100 million or so in "pay for success bonds." Designed to prevent problems before they balloon into huge cost sinks, the idea just might work in producing the social change Americans deserve.
The idea comes from Great Britain, which only recently launched a pilot program that encourages private investment in preventing prisoner recidivism. Although Britain's social-impact bond program has yet to be fully tested, it encourages agencies to raise the bar on performance. Investors only get their money and a bit of profit back if programs actually produce measurable gains in impact.
Obama's budget contains a brief commitment to the idea in its long and often tedious list of relatively small reforms in how the bureaucracy pays for travel, supplies and printing. Video conferencing is in there someplace, as is double-sided copying, electronic paycheck deposits and painting U.S. embassies a standard white.
Why these reforms were not implemented long ago is anyone's guess, but they speak to the continued need for a massive overhaul of the aging federal bureaucracy. Although Obama compared his reorganization plan to the giant reforms that occurred 70 years ago under former President Herbert Hoover, his intentions appear to be limited to minor tinkering, and must have Hoover spinning in his grave.
Nevertheless, the budget overview does contain a commitment to the pay-for-success concept, an idea recently celebrated in a thorough report by the Center for American Progress. The idea not only promises future savings but meets public demands for solving problems, not sustaining them.
The idea is simple: Private investors would give money to social impact bond-issuing organizations (SSBIOs), which would front the money for early interventions to prevent problems such as poor health. As an aside, Obama aides aren't sure that the president is actually going to use the word "bond," however, perhaps because it smacks of Wall Street. Expect some waffling on the specific term.
In turn, these bond-issuing organizations would give large blocks of money to social service agencies for specifically promising early intervention. These investments would allow agencies to grow their programs quickly, while sparing them the payment delays now rife in social service contracting.
Assuming that the agencies meet clear performance targets over, say, a three-year period, the federal government would eventually give the SSBIOs and investors their money back, plus some as-yet-to-be-determined but relatively low rate of return based on clear evidence of future dollars saved.
In theory, the private investors and SSBIOs will put maximum pressure on the social service agencies to deliver early gains in preventing future costs. Everyone benefits, most importantly the individuals and families who enter the programs. Advocates promise greater innovation, more efficiency and a heightened concern with designing programs that work.
In reality, it is not yet clear whether the drive for high rates of return might actually weaken performance. There is no doubt that some social service agencies are sluggish and inefficient. But much of this sluggishness comes from low pay, weak organizations and poor leadership. Just as it takes money to make money in the private sector, it will take money to make targets in most social programs.
Unless investors and the SSBIOs put at least some of their money into administrative infrastructure, needed mergers and acquisitions, and reasonable merit-based pay, higher performance will remain just out of reach. The last thing social service agencies need are even more programs that arrive with zero overhead.
There is no lack of desire to make a difference among most of these agencies--rather, there is a persistent lack of the "stuff" that makes high performance possible, meaning high-speed Internet, real-time budget systems, cash reserves, safe working space, strong boards and steady leadership. It is one thing to encourage agencies to do double-sided copying; it's quite another to give them the copiers to do so.
More importantly, innovation involves trial and error, which means that at least some of the social impact bonds will end up in failed programs. There is far too much rhetoric these days about programs that work, and not enough appreciation for the lessons learned from programs that fail. Scroll through the Websites of the big funders of social entrepreneurship, and you will almost never find an example of a program that just didn't work.
Curing these problems won't be easy, but the idea has enormous merit. This is why the Rockefeller Foundation just poured $400,000 into a study of implementation to be conducted by the widely respected Nonprofit Finance Fund. Like Obama, Rockefeller imagines billons of private and venture capital suddenly in play for preventing persistent social problems such as hunger, disease and illiteracy.
If done well, social impact bonds may be the best idea to come along for improving performance in decades. Obama deserves credit for bringing it forward. Soon it will be up to private investors to put their money in play.
By Paul Light