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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 overviewdoes 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

 |  February 18, 2011; 1:02 PM ET |  Category:  Federal government leadership , Public leadership Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
Previous: Obama's and Boehner's Lilliputian budget cuts | Next: Mark Warner to the budget rescue


Please email us to report offensive comments.

I will tryt one more time-my earler posting did not make it-possibly my fault in either hitinga key or not hittingthe right key- I like thaose options rather than believe that my post was eliminated because I suggested- noting the early morning time- that the explanation by Mr. Light of this marvelous positive tool hidden in the proposed budget was as obtuse as anytjhing I have ever seen-aand could not make sense to anyone unless tehy already understood the proposal -enough said I will not try a third time understand the Lirwould be

Posted by: 27anon72 | February 25, 2011 4:58 AM

quick reaction- it is dangerous to post anything at 4;22am but I willa dmit to not understanding the basic article published by "Light on Leadership" I challeng anyone including the Light one himself to claim that his article explains anything to a reader who has no previous contact with whatever it is he is talking about! and who at rhge Washington Post vets articles like this one. gobblygook personified

Posted by: 27anon72 | February 25, 2011 4:26 AM

Can I direct my "investment" to specific organizations or causes? How is success measured and is it defined before or after the money is given out? Who does the accounting on the long term benefit and will it be similar to the calculations used to say that the Super Bowl give a city a $500 million return? Do I get a tax deduction for a charitable contribution when I make the investment, when it fails to return my investment because they didn't perform, or never?

Why not just cut out the middle man? Funnelling my money through the federal government just means that maybe 80% of the funds will go to the end beneficiary and the rest will be eaten by the bureaucracy. If you have a cause you like, write them a check

Posted by: whome_2 | February 24, 2011 4:36 PM

The Stanford Social Innovation Review recently wrote an article (http://www.ssireview.org/articles/entry/whats_next_unlocking_future_savings/) detailing the Social Impact Bond projects underway in the UK.

Bonds are being sold where investor can invest in counseling, rehab service, and education for prisoners. The investors will be financially rewarded if the programs reduce recidivism rates, therefore saving the government money spent keeping prisoners.

Posted by: rherediassir | February 22, 2011 7:30 PM

I agree that this is probably the best idea in the budget, however that is not saying much!
What attracts the investors? Long term investment with low return? This is really shooting in the dark and hoping one hits the target.
Let's turn the lights on and deal with real money savers.

Posted by: hebe1 | February 22, 2011 2:18 PM

"Private" investors pushing huge amounts of money to Planned Parenthood, or Peaceaholics, or ??? With the hope of reaping "returns" when some metric is met? Who is measuring the performance? Who is the SSBIO?

Where's the paragraph with the lead in..."In the event the outcomes are not achieved, bond holders would...."

The whole thing sounds like Fantasyland, and the chance of any funds being approved for this are zero. Good stuff for chin strokers, faculty lounge lizards, and pipe smokers to dream about though.

Posted by: Curmudgeon10 | February 21, 2011 4:16 PM

Sounds like yet another wealth redistribution plan to me. Where is the oversight to assure these funds will not be embezzled by unscrupulous agencies, either by paying employees outlandish salaries or outright theft?

Posted by: kavalair | February 21, 2011 10:59 AM

"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."

Don't try to sweet talk us social service providers too much, Mr. Light. You'll make us blush!

Posted by: jb1151 | February 21, 2011 12:20 AM

A key if not essential ingredient for success is missing from the Rx above: The science and technology for success. Without this, one can work longer and herder but still make little (if any) progress.

Consider medicine one hundred years ago. It was well to avoid doctors. They cost, did little good other than comfort, and they could (and did) do harm. WIth benefit of science and technology, medicine has been transformed, and largely for the better.

In the social service area, consider interventions to prevent and for delinquency and criminality. A comprehensive review of evaluations of interventions for these three focuses found, in two words, "nothing worked." That has now changed for interventions for delinquents, thanks to NIH research that provided the science-base for effective interventions, and for NIH funded treatment evaluation research that enabled demonstrations of high efficacy for each of two models that utilized the science-base with full application of the research findings. In addition to substantial reductions in delinquency (large enough to qualify for FDA approval if a drug), these science-based models have substantial financial benefits to cost ratios, and this only for the delinquency. Add the significantly reduced teen parenting, and the financial benefits to cost ratio soars.

Consider interventions for children of disadvantaged families. Evaluations find dismal results. Again, NIH research shows the way to success. (See Risley and Hart, Meaningful Differences). Research on vocabulary development (vocabulary correlates better than .9 with verbal IQ) of little ones provided a science-base for a transformative intervention. The intervention: 20 hrs./wk in home visitation from 8 mos. to 3 yrs. for verbal interactions. The results: At 4th grade, average IQS of 100 and educational achievement at grade level.

Think smart: Do the science.

Act Smart: Implement the research findings with adherence to the science.

For good use of limited money, fund ONLY programs whose models are evidence-based.

Posted by: jimb | February 19, 2011 8:19 PM

I can see Wall Street going for that, they bet on anything and they like high risk / high return investments. What would the return be if they win, 35% and up? And if you lose, lose just a percentage? or lose everything. In the same way a lot of illegals would be willing to fight wars, take out Egypt or Iran for free labor but free citizenship, and Wall Street fund materials. I have an idea of my own. Every provider in health have a cost per minute value, patients carry a portable time clock (made in China of course). When they get treatment the provider time's in and time's out on the patient clock. At the end of treatment a secretary logs in time for administration, building and maintenance, and profit with those dollar per minute values. In that way we know where the money goes for health.

Posted by: bwcolq | February 19, 2011 9:10 AM

Very Interesting! I just now printed Coupons of my Favorite Brands for free from "Printapons" you can find them online.

Posted by: dayleslover | February 19, 2011 5:52 AM

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