Outcomes and contracting: an introduction
At MAZE, we have been working for the past eight years with a range of partners to foster the adoption of outcome-based contracts in social services. Amongst these, we have been partnering closely with the Calouste Gulbenkian Foundation as well as the Portuguese Government.
In 2014-15, we helped the creation of the first public structure using European Union Structural Funds whose mission is to promote social investment in the country: Portugal Inovação Social (EMPIS) mobilised €150 million for different social finance instruments with the aim of enabling social organisations in accessing financial and non-financial support.
A significant part of the social finance instruments launched by Portugal Inovação Social are outcome-based. These instruments have the objectives of (1) ensuring that investees are focused on outcomes, (2) fostering outcome-based funding amongst the public sector, and (3) linking funding to the achievement of pre-established and measurable outcomes.
As a result, in the past years, MAZE has structured, launched, and managed five social impact bonds, which are a well-known outcome-based funding instrument. These social impact bonds have been implemented in thematic areas such as employment, education, children and youth at risk, and informal caregivers.
In our work, we interact with a variety of stakeholders, for whom some of these concepts are often not clear or easy to grasp. Hence, we hereby intend to outline what our work means in simple and short answers.
What are social services?
Social services are public services implemented by public sector organisations – at central or local level – or by other organisations – on behalf of the public sector – across various thematic areas with the aim of providing support towards specific segments of the population. These services encompass social housing, social protection, children services, elderly care, health services, as well as areas such as mobility, food security, legal support, amongst others. Social services deliver important outcomes which are expected to impact the lives of their users tangibly and positively.
Why are social services important?
The access to most of these services is a human right. The provision of public services in an equitable way, that reduces inequality and addresses underserved and vulnerable communities, is the responsibility of a democratic state.
What is an outcome?
An outcome is what changes for an individual as the result of a service. For example, a person who enters sustained employment is benefitting an employment outcome provided by a given social service.
What is outcome-based contracting?
Outcome-based contracting is a mechanism whereby service providers (those that implement a social service) are contracted based on the achievement of outcomes. This can entail tying outcomes into the contract and/or linking payments to the achievement of outcomes. If the outcomes are verified through an independent impact assessment, the outcome payer (normally the public sector) pays for such outcomes accordingly.
Why is outcome-based contracting important?
Traditionally, public contracting of social services is linked to inputs or activities. This means that such services are negotiated based on financial needs, staffing, number of activities developed, or number of people participating.
By linking contracting and/or funding to outcomes, the incentives are redesigned. Thus, the focus becomes the achievement of a certain outcome, in the most efficient way. Through outcome-based contracting, organisations can design, innovate, and improve existing solutions that tackle social problems, in more effective ways, whilst being remunerated accordingly.
For example, public contracting of employment services based on inputs or activities has a focus on the number of people participating and/or the number of hours of employment support provided. If a public contracting of employment services is based on outcomes, it will rather have a focus on the number of people that enter the job market because of those employment services. Finding a job is the intended outcome.
What is a Social Impact Bond?
A Social Impact Bond (SIB) is a well-known instrument for outcome-based contracting (but not the only one).
In a SIB, investors provide upfront funding for the deployment of a specific service/intervention, which has the expectation of achieving certain outcomes. If, and only if, the outcomes are achieved, the outcome payer (typically a public sector entity) will pay back the upfront capital, and possibly a return, to the investors. The following figure is a simplified representation of a general SIB.
Why are Social Impact Bonds important?
Social Impact Bonds have a set of potential benefits. They shift most of the risk away from social organisations and public sector entities, which allows service providers to try out new things that might bring innovative approaches to service delivery. In addition, because SIBs require performance and impact assessment, they are also good instruments to calibrate existing solutions that have not yet achieved scale or integration into public policy. Finally, SIBs also focus on preventative interventions, which represent a better balance between acute services and those that are preventative to address the root causes of problems.
Outcome-based contracting is still in its infancy and there is a long way to go in providing literacy and decreasing complexity around this topic. However, the wider adoption of outcome-based contracting will have a positive systemic impact on social services.
At MAZE we believe that governance and financial mechanisms that place both outcomes and users at the centre, are pre-conditions to unlock public systems that enable more sustainable and inclusive societies.