Performance-Based Contracting: Rules for the Road

August 2017

Background

An ally of the mayor’s office in a major American city turned to the Leap Ambassadors Community for advice as it develops a framework for performance- (i.e., outcomes-) based contracting. Given the community’s commitment to advancing the “performance matters” mindset in the social and public sectors and many ambassadors’ deep knowledge and relevant experience in performance-based contracting, they shared sound input and resources for this city’s challenging road ahead.

Summary

Thirteen Leap Ambassadors and two outside advisors, several with battle scars from engaging in the hard work of performance-based contracting, responded. Their overarching advice: Performance-based contracting has a potential role to play in driving local governments to do business differently and help move performance to center stage. But proceed with caution. The status quo is deeply entrenched. There’s a right way and a wrong way to approach this. A few highlights from their collective advice:

Prepare for politics. There is no “blanket standard” for performance-based contracting. There are complexities and nuances that must be worked out along the way. But the harsh reality is that nuance and complexity can be lost on government when financial arrangements are seen as purely transactional and fail to take the political and social implications fully into account. As Michael Shaver explains:

“While our thinking about how to structure the work, payment, and accountability is necessarily layered with nuance and complexity, the political narrative can be more coarse. Profiting at the expense of the needy, financially incentivizing doing the right thing, using contracts and financing to punish an already beleaguered sector are just a few examples.”

In other words, prepare for your motives to be questioned. As Shaver warns, “When something doesn’t go as planned—a near certainty—the entire approach becomes suspect, rather than the complexities of a particular service or contract.”

Caroline Whistler offers advice for navigating this tricky environment: Focus on “changing the process for resource allocation, not finding the perfect program.” She explains:

“Evidence-based programs remain the best hypothesis to deliver outcomes, but governments need to set up processes that continuously track results for communities and allow providers to learn, improve, and respond to changing community dynamics over time. Locking providers into service delivery ’recipes’ stifles their ability to learn, improve performance, and measurably improve lives …”

Emphasizing continuous learning and improvement from the get-go and resisting the rush to “find what works and scale it” may help both recipients and government agencies prepare for the perilous political course ahead.

Center relationships. Like all relationships between grantees and funders, partnerships between nonprofits and government are fraught. This problem is exacerbated in the public sector due to many agencies’ dependence on government for large swaths, sometimes even the majority, of their funding. Daniel Stid puts it bluntly:

“The big issue/challenge here is the problem of ’monopsony’ arising from the fact that city agencies hold dominant market power as practically speaking [they are] the sole buyer for many human services in a given jurisdiction. This can lead to some bad and heavy-handed behavior on their part that undermines the partnership aspect needed to negotiate and execute true performance-based contracts.”

What to do? Joe McCannon says it’s about “shared accountability” and describes what that looks like:

“They [the government agency and the recipient of the funding] should sit on the same side of the table with one another, jointly invested in solving the problem, creating an environment that is safe for failing and learning, where the government agency is responsible for removing barriers to progress, as opposed to just sitting in judgment.”

Shaver emphasizes transparency and creating a sense of shared cause. Performance contracting “shouldn’t be done TO contracted service providers; it should be done WITH them,” he advises. “In my experience, it’s very rare to find a provider who is not just as invested in successful outcomes as the funder. Approach the work with that assumption in mind.”

Service providers should be involved in the contract design not only to generate mutual trust, but also, Antony Bugg-Levine explains, “to develop more reasonable and informed contracts.” As Gordon Berlin notes, performance-based contracting and its focus on outcomes can bring a valuable return on investment to the public sector and, done well, it can simultaneously strengthen service provider effectiveness. But only if consciously designed “not to eat away at margins” and “the ability to perform at a high level for their clients.” It’s in the government’s interest to reward the nonprofit when it delivers (for example, by reimbursing its overhead costs), “not nickel and dimed until it struggles.”

And finally, as Stid reminds us, maintaining the “performance matters” mindset (and staffing performance-based contracts not with bean counters, but those who understand and embrace that mindset) helps get past relationships that are purely transactional: “Demand an understanding of the outcomes in question and what it takes to produce them, as well as the ability to identify and work with nonprofits who will provide the best value via their performance, not simply the lowest price.”

Always keep in mind, however, that change is hard. Bugg-Levine points out the challenge that’s often overlooked: “The current system, however inefficient it is, has participants who value their role in it and that any attempt to build a new way of working must acknowledge and manage those allegiances.” People will adapt to a better way of working when they are able to take pride in their role in it.

Build confidence by building data. Government data is often inadequate and hard to access, yet performance contracting isn’t possible without data in which all parties have a great deal of confidence. Shaver advises: “If it’s not available, build it first. Both government and service providers need to have confidence there is a verifiable way to move the needle in a way that both validates outcomes and is consistent with the cost model upon which the contract is based.”

Whistler warns about jumping into performance contracting without reckoning with the reality that “you can only contract for what you can measure” and further notes that most “systems have been structured for compliance, not outcomes/impact tracking.” Since evidence-based contracting depends on evidence-based decision making, it’s critical that tracking systems adapt to what nonprofits and government agencies learn along the way. As outcomes are further refined, data tracking must be, too. Building the capacity in both government and nonprofits to work in an outcomes-oriented system isn’t easy (or cheap), but it’s the ball game.

To complicate things further, Berlin offers an important warning: “If the right things aren’t measured, rewarding ’what you measure’ isn’t necessarily a good thing. Government agencies and service providers must agree upon meaningful characteristics of those served to avoid creating pressure on the nonprofit to alter who they serve just to get paid.”

Never, ever forget the people you serve: Relationships within and between government and service providers aren’t the only ones that matter. “To measure success or failure against a performance contract often requires a higher level of intrusiveness into the lives of people served,” Bugg-Levine reminds us. “Successful contracts that improve performance over time will engage program participants to create a dynamic and understanding which really does align their interest to program success rather than just stipulate that alignment.”

For further relevant input from the community that augments the guidance above, see SIBs: What’s Missing?.

Recommended Experts

Leap Ambassadors recommend benefiting from the advice of experts with knowledge in the field, including:

Linda Gibbs, Bloomberg Associates, heads the Social Services team, which assists the Mayor in shaping interventions with an approach that is data driven and evidence based. (Michele Jolin)
Simone Brody, Results for America (RFA), is RFA’s What Works Cities Executive Director. RFA helps cities with performance-based contracting in its What Works Cities program (Michele Jolin)
Caroline Whistler, Third Sector, would be happy to share thoughts with the city based on work with pay for success and outcomes-based contracting at Third Sector
Idara Nickelson helped implement and oversee performance-based contracting at DC’s Department of Human Services. She also worked with other cities in interested in doing the same, providing technical assistance and support through workgroups established by various affinity groups.

Outside advisors also recommend:

Gary Glickman, Accenture, is managing director of Pay for Success initiatives, formerly an official at the U.S. Treasury and Office of Management and Budget (Steve Goldberg)
Jeffrey Liebman, Harvard Kennedy School, is Professor of Public Policy, formerly an official at the Office of Management and Budget. Provides pro bono assistance to state and local governments interested in implementing pay for success contracts using social impact bonds. (Steve Goldberg)

Recommended Reports, Articles, and Other References

Leap Ambassadors recommend the following resources to begin to establish a knowledge base about both the history and current thinking on performance-based contracting:

Performance-based contracting in social welfare programs, American Review of Public Administration, C.J. Heinrich and Y. Choi, 2007 (Jennifer Brooks)
Cream-Skimming, Parking and Other Intended and Unintended Effects of Performance-Based Contracting in Social Welfare Services, IZA Discussion Paper, Pierre Koning and Carolyn Heinrich, 2010 (Jennifer Brooks)
The Promise and Pitfalls of Performance-Based Contracting, Seedco, Dennis Smith and William Grinker, 2004 (Daniel Stid)
Five Ways to Navigate the Fiscal Crisis, Stanford Social Innovation Review, Daniel Stid and Willa Seldon, 2012 (Daniel Stid)
The Toxicity of Pay for Performance (in healthcare) by Don Berwick, Institute for Healthcare Improvement, 1995 (Joe McCannon)
Uncontrolled, Jim Manzi, on the near impossibility of replicating successful results in an RCT setting, 2012 (Caroline Whistler)
Truly Making a Difference: The Outcome/Impact Dilemma, Gordon Berlin, MDRC, Investing in Results, 2017
The Other Pay for Success: The Promise and Peril of Paying for Outcomes, Social Innovation Research Center, 2015 (Patrick Lester)
The Next Phase of Pay for Success: Driving Public Sector Outcomes, Third Sector Capital Partners, April 24, 2017 (Patrick Lester)
How Seattle Used Results-driven Contracting to Improve Homeless Services podcast, Gov Innovator, May 10, 2017 (Patrick Lester)
Transforming the Culture of Procurement in State and Local Government podcast, Gov Innovator, April 20, 2017, (Patrick Lester)
Urban Institute’s Center on Nonprofits and Philanthropy has produced a fairly robust body of research on this topic. (Mary Winkler)
Online blog series, Stanford Social Innovation Review, about the process by which communities define positive outcomes they want to achieve in their contracting and how continuous learning (vs. pass/fail metrics) are critical to supporting a transition to outcomes. Shoutout to Ambassador Jennifer Brooks who contributed with “Making the Case for Evidence-Based Decision-Making,” 2016 (Caroline Whistler)
“Underwriting Innovation: How Information Technology and Pay for Success Contracting Can Transform Public-Sector Outcomes,” Chapter 10, What Matters: Investing in Results to Build Strong, Vibrant Communities, how to structure data systems for outcomes contracting, 2017 (Caroline Whistler)
Fostering Accountability: Using Evidence to Guide and Improve Child Welfare Policy, Oxford University Press, 2010, includes “a painstaking walk-through of our approach, the numbers, and lessons learned,” based on working in the public sector with Illinois’ and Philadelphia’s child welfare systems. (Michael Shaver)
Third Sector Capital Partners is focusing on helping governments develop integrated data systems (IDS) with UPenn’s Actionable Intelligence for Social Policy (AISP) to build the infrastructure to underwrite outcomes contracts. Annie Casey has done some great work on this including a short film overview of Integrated data systems , including Cuyahoga County’s Pay for Success project, 2017 (Caroline Whistler)
Streamlined Contracting, performance-based contracting in New Zealand supported by Results-Based Accountability, 2016 (Adam Luecking)

Outside advisors also recommend:

From Funding Activities to Investing in Results: How Do We Get from Here to There? Antony Bugg-Levine, Nonprofit Finance Fund, Investing in Results, 2017
Performance-based Contracting in NYC: Progressive Practice or Punitive Pursuit? Jaclyn Kelly and Margaret Ross-Martin, Nonprofit Finance Fund, Investing in Results, 2017 (Antony Bugg-Levine)
Rules and Rituals: How to Drive Change, Zia Khan, The Rockefeller Foundation, Investing in Results, 2017 (Antony Bugg-Levine)
Governing by Network, Stephen Goldsmith and William Eggers. Provides an insiders’ view on transforming business-as-usual in public sector. (Steve Goldberg)

Acknowledgments

Sincere thanks to the thirteen ambassadors who shared the guidance and resources that made this Ambassador Insight possible: Molly Baldwin, Gordon Berlin, Jennifer Brooks, Paul Carttar, Michelle Jolin, Patrick Lester, Adam Luecking, Joe McCannon, Idara Nickelson, Michael Shaver, Daniel Stid, Caroline Whistler, and Mary Winkler. Two outside advisors, Antony Bugg-Levine and Steve Goldberg, also shared keen insights and we are grateful.