Giving Compass' Take:

• Stanford Social Innovation Review explores the practice of pay-for-success financing, in which a project that reaches pre-determined outcomes could produce ROI.

• Not all interventions are created equal, however, which makes pay-for-success still a work in progress as a funding tool. How should evidence-based programs adjust to this model?

• Here's how pay-for-success is making an impact in the field of bail reform.

There is growing excitement about the potential of pay-for-success (PFS) financing, which allows independent investors to finance social interventions aimed at issues or problems of interest to the public sector. If a PFS project achieves pre-determined outcomes, the public sector will repay the private investors, potentially with a return on the investment.

The number of pay-for-success projects in the United States and worldwide continues to rise, with applications in an expanding array of human service, public health, education, employment, community corrections, and environmental interventions. Some examples of launched PFS interventions include supportive housing, post-incarceration job training, early childhood education, and nurse home-visiting for pregnant women. Our research shows significant potential for PFS to address the social determinants of health and wellness, which the World Health Organization defines as 'the conditions in which people are born, grow, live, work and age.'

In this nascent field, however, there is little consensus regarding what makes an intervention appropriate for PFS. Some believe an intervention should have a strong evidence base for effectiveness, including randomized trials and cost analyses, before being considered for PFS financing.

They argue that if the intervention’s effects and costs relative to benefits are unknown, a performance-based contract and payout schedule cannot be crafted without a huge amount of guessing and wishful thinking. Others argue that these academic standards of evidence are too high and unrealistic for PFS application in the real world. They argue that “evidence-informed” or theoretically plausible interventions with some promising pilot information should be sufficient for PFS financing. A third perspective holds that PFS financing is appropriate for innovative and unproven interventions as long as an investor is willing to take the risk.

Read the full article about pay-for-success financing by Paula Lantz & Samantha Iovan at Stanford Social Innovation Review.