While the concept of Social Impact Bonds (SIBs) jumped the Atlantic from Britain in 2011, it is taking its time to develop in Canada. Unlike American and Australian counterparts that are already testing the concept, SIBs seem to be increasingly discussed in Canada, but are not yet in the testing phase. Several links to recent conversations are provided at the end of this article.
The benefits of SIBs have been discussed primarily in three ways. First, SIBs are a tool to raise finances to invest in social programming from non-government sources. The role of government is then to pay the investor if the investment in a social agency’s ability to provide a service (i.e. to achieve agreed outcomes) is fulfilled. This relationship creates the second benefit, i.e. SIBs enable governments to invest current dollars elsewhere as money raised from alternative sources is funding the daily activities of the social agencies/investees. Finally, SIBs allow government to benefit from prevention, which is typically less expensive than investing to manage or to resolve a problem. Government pays a premium to the investor if agreed outcomes are achieved. If outcomes are not achieved, the investor has lost money.
Many questions linger about the application and structure of SIBs. Significant questions include how government will value agreed outcomes in order to pay investors a fair price for the risk taken in the course of enabling social outcomes to be achieved, and for creating opportunity for government to direct scarce resources elsewhere in the short term. But how to value outcomes?
Challenges in valuing outcomes
There are five hurdles related to assigning value to outcomes that need to be overcome if SIBs are to truly reflect value created for government, investors and investees (social organizations involved in implementation). These are:
1. A lack of clarity on the real potential to achieve cost-savings, and their timeframe. At present, there is a tendency to focus on cost-savings, to the exclusion of other value that may result from a successful investment. In most circumstances, what is being described as cost-savings is actually cost reallocation, i.e. creating space within systems operating on finite resources. Unless there is real cash that can be reallocated to a different purpose without jeopardizing effectiveness or service quality from the client’s perspective, cost-savings will not occur. If the timeframe of this cost savings is in the future, it should be considered future cost avoidance (i.e. an increased cost that will not occur in the future, which is different than a current cost that is not incurred.)
2. The need to consider other forms of value creation. Cost reallocation, changes in taxes paid, changes in income, and future cost avoidance should all be considered with respect to any outcome. This is particularly important when claiming money will be saved for the government, as money may not actually be saved, per se, but rather reallocated within the framework of government services (e.g. if fewer offenders are re-offending when leaving prison, it may not mean that the prison can have fewer guards, or fewer beds, which would result in cost savings, but rather that the system is less strained and more efficient).
3. The need to consider value from the stakeholder’s perspectives. SIBs typically focus on the value of anticipated cost savings to the public sector, without considering value from the perspective of those involved in the service, i.e. the target stakeholders (the one(s) experiencing change so that the ripple effect value of other stakeholder change is achieved). With clarity on the value to the target stakeholder, the service provider has a much higher likelihood of offering that valuable change in such a way that the target stakeholder will seek to maintain it over time. Fundamentally, ignoring this value opens the potential to miss the mark in effective service delivery and will result in undervaluing the outcomes achieved.
4. Confusion between outcomes and impact. An outcome is the whole change achieved, including all influences and contributing factors, whereas the impact of that program refers to change directly linked to the service that is provided. The value of impact discounts the value of outcomes to account for external factors, unintended consequences, individual stakeholder initiative, and drop-off over time.
5. The opportunity for horizontal value creation. From a public sector perspective, the value being created often has cross-departmental and inter-governmental implications, yet the public sector operates in silos. The risk of a siloed approach is decreased perception of value, which will influence investment priorities, investment decision-making and agreement on the value of outcomes.
Social Impact Bonds are an exciting and innovative way to think about bringing new and much-needed resources to achieve valued social outcomes. Without addressing the above hurdles, it will be a challenge to realize their full potential.
SIB-related Links:
http://www.socialfinance.org.uk/work/sibs
http://mckinseyonsociety.com/social-impact-bonds
http://nonprofitfinancefund.org/pay-for-success
http://www.americanprogress.org/issues/economy/news/2012/11/05/
http://www.abc.net.au/news/2012-03-26/nsw-government-to-sell-social-bonds/3913226
Stephanie Robertson founded SiMPACT Strategy Group in 2004 and launched LBG Canada in 2005. As the first accredited SROI practitioner in North America, Stephanie is a leading professional in the area of social impact management and measurement.
Anne Miller is Team Lead of the Social Return On Investment (SROI) Initiative at the SiMPACT Strategy Group, a specialist agency in social impact management, measurement and valuation.