More than 80% of Pinnacle’s projects are publicly funded. When we ran across a workshop by the Nonprofit Association of Oregon on Pay for Success we attended to find out a little more about this new funding method.

Pay for Success is a new approach to funding public service projects (homelessness, early education, etc.) in which governments pay for services only if and when a service provider (nonprofit) achieves clearly defined, measurable results. Traditionally contracts or grants are based on the volume of services delivered (e.g. the number of children attending preschool). In a pay for success contract, the payor (typically government) agrees to provide funding when the service provider (nonprofit) achieves a pre-agreed result (e.g. number of kindergartener who pass a specific placement test after attending preschool). In the example, the goal is to ensure the preschool program is having a measured positive impact on Kindergarten readiness and reward those outcomes. Pay for Success leverages upfront funding for service providers from the private sector and philanthropic foundations and thoroughly measures the effectiveness of programs over time by a third-party reviewer. The payor does not pay unless the outcome is achieved.
Here is a visual from the Nonprofit Finance Fund that helps show the flow of funds.

Still a bit confusing? Let’s walk through an example.

Project Welcome Home
Project Welcome Home will provide community-based clinical services (healthcare and counseling) and permanent supportive housing to 150-200 chronically homeless individuals in Santa Clara County, California who are frequent users of the County’s emergency rooms, acute mental health facilities, and jail. The goal, over the next six years, is to increase stability and improve health by achieving 12 months of housing stability, ending homelessness and reducing the cost of public services. The project was launched in August of 2015 by the service provider Adobe Services. Santa Clara County is the payor ($12m over 6.25 yrs) and $6.9m was invested by private funders.

Per the county, “One year in, the program is meeting its success metric. The county is tracking and paying for outcomes that better target taxpayer dollars to improve lives.” See the details here of this PFS project.

The first PFS project in the U.S. launched in 2012. As of early 2017, over a dozen projects have launched and one has completed. Most are around three issue areas: criminal justice and recidivism; early childhood education; and homelessness. Per the Nonprofit Finance Fund, between $5 and $10 million is an appropriate minimum threshold for a PFS project, given both the relatively high transaction costs and the interest of investors (particularly commercial ones) in larger investment opportunities. A report published in 2016 gives an overview of the first generation Pay for Success projects.

Benefits and Challenges of Pay for Success

This method is intended to improve the ability to deliver better results versus being a financial innovation. It drives collaboration which is a benefit and a challenge. These early projects should offer lessons learned that can reduce the cost and complexity of future projects by introducing efficiencies in the project development phase. Still a work in progress but we’re excited to watch how these early projects are changing lives.

Multiple organizations are providing funding to help structure these programs. Find out more about these opportunities.

Jessica BielJessica Biel is Business Development Director at Pinnacle Architecture. Jessica brings over 15 years of experience in strategic marketing and content development at global architecture firms. She’s passionate about learning everything she can about her client’s business, their struggles, and what makes them shout with joy. Through research and developing educational content, Jessica helps communicate the benefits of good architectural design that enhance lives and communities. Jessica can be reached at 541.388.9897×16 or Jessica@Parch.Biz.