By Steve Kelman
Harvard Professor Jeffrey Liebman says "social impact bonds" are actually strict performance-based contracts with a twist.
My colleague Jeff Liebman – a Kennedy School economist who had a senior position in the Office of Management and Budget for the first few years of the Obama administration – gave an interesting faculty seminar recently on work he has been doing on what are called (somewhat misleadingly in his view) "social impact bonds." This idea originated in the United Kingdom and has begun to spread to state governments in the US. I am wondering whether it conceivably might have some applicability in the federal government.
As Jeff pointed out in his presentation, "social impact bonds" are actually strict performance-based contracts with a twist. A contractor signs up for some performance objective over a period of years. If they achieve the performance objective, they are paid at a rate that will provide them a decent, but not huge, return on their investment. If they don’t achieve the objective, they are not paid.
So far, these contracts have been used almost exclusively for hard-to-solve social problems, such as reducing criminal recidivism or finding jobs for the hard-to-employ. So a contractor taking one of these jobs is signing up for a big risk of not getting paid.
Why would any contractor (mostly, in these cases, not-for-profits) sign up for this, given the risk and the relatively small profits even if successful?
This is the twist in "social impact bonds," and the reason for its name. Contractors do not take most of the risk themselves. Instead, the contractor's expenses, and a modest profit, are funded by foundations that are interested in solving the social problem the contract seeks to address. (The contractor is in effect borrowing money from the foundation and issuing a "bond.") The contractor typically gets some additional profit from the foundation if the performance objectives are met. For the foundation, this is an alternative to giving the non-profit a grant, which is unlikely to be as strongly performance-based. If the contractor fails, the foundation takes the loss.
The pool of capital for these efforts has more recently been expanded in two ways. Some private companies (such as Goldman Sachs) are investing in these as a pro bono investment that they at best hope maybe to break even on. More importantly, there are beginning to appear in the private market "shares" in these social impact bonds that wealthy people who would like to do some socially responsible investing are buying. (For states working on this arrangement for social programs, Jeff has set up a Harvard-based group that provides technical assistance to states and nonprofits going down this road.)
Like share-in-savings contracting, social impact bonds can be an especially attractive form of funding for organizations in tight budget times. (Share-in-savings can work in the absence of socially responsible investors because private firms receive a higher profit in exchange for the greater risk they take.) Listening to Jeff’s presentation, I wondered whether this could be used in the federal government.
I think most (but maybe not all) direct-delivery social programs are delivered by state and local government, not the federal government – though the Bureau of Prisons presumably also worries about re-offending, at least to some extent. But I was wondering whether there might be at least some situations where foundations or socially responsible investors might be willing to lend money to organizations that take on these challenges. One thought that came to mind might be wealthy immigrants who might be interested in investing in an IT application for Citizenship and Immigration Services at DHS.
Might there be some wealthy ex-military personnel (or just people who enthusiastically support national defense) who would be willing to invest in a risky Defense Department mission-related application? And how about using this for some performance-based research funding for the National Institutes of Health? (One thing to keep in mind is that these "bonds" are going to involve relatively limited amounts of money – don’t expect billion-dollar projects to be funded this way.)
Just some thoughts. In tight budget times, we need to become more creative. Reactions?
Posted on Mar 12, 2013 at 4:51 PM3 comments
An encounter with a helpful TSA agent -- though not this unidentified one -- inspired some thoughts on customer service for Steve Kelman. (Stock photo by Carolina K. Smith MD)
I had a great customer service experience with the Transportation Security Administration at Logan Airport in Boston recently. While I was going through my ticket and driver’s license check, the screener said to me, "Don’t forget about renewing your license – Massachusetts doesn’t send reminders." (My license expires in a few months.) I didn’t know Massachusetts doesn’t send reminders, so I’ve now put it on my calendar to make sure I take care of it in time.
I tell this story for several reasons. First, I want to acknowledge the good customer service from the oft-reviled TSA. My own experience as a very frequent traveler is that this is far, far closer to the norm than the stories about grannies or three-year olds getting aggressively searched that the public often hears. Second, I want to point out that this experience took place the very day that sequestration took effect. Here was an employee who did not allow herself to wallow in a sequestration funk, but instead continued to serve the public in a way that went beyond her job description. This should be a model for how civil servants in general react to sequestration, in my view – try to avoid getting into a passive victim mode.
There is a third lesson in this story that applies all the time, sequestration or not. It is that there are many ways to improve customer service – or an organization’s performance more generally – that cost nothing, but simply require employees and managers to think creatively. I suspect that for virtually every job any government employee performs, there is a cost-free way to do the job better, waiting for the employee to realize the opportunity that’s there. Add up a lot of those individual ideas, and suddenly there’s a noticeable improvement in customer service or some other aspect of organizational performance.
For that to be realized, of course, what is required is not just individual creativity – though that’s an important part of it – but also managers willing to take the ideas beyond the employee’s own individual way of doing his or her job. So in the Massachusetts driver’s license example, I’d love to see TSA at Logan turn this individual employee’s smart idea into a standard operating procedure for screeners checking driver’s licenses.
Maybe a good way for feds to avoid sequestration funk is to show that even in tough times, feds can and will continue to be creative, and continue to serve the public – just like my TSA screener did.
Posted on Mar 05, 2013 at 9:35 AM1 comments
In order to maintain agency work during sequestration, managers need to be empowered to deal with poor performing employees, Steve Kelman writes. (Stock image)
Over the past few weeks, I have periodically felt slightly weird in writing my blog posts. Here I was continuing to write my normal posts about how to improve organizational performance and management, as if the situation in agencies was just proceeding as normal, while many of my readers were focused on the possibility of furloughs and the other disruptions of an increasingly certain sequestration.
So the first thing I want to do in this post is to say to my readers in and around government that, as one taxpayer, I am grateful for what you do and saddened that you are about to be run over by a rogue bus. As I say to my executive education classes, there is no group for whom the gap between what people are actually achieving and accomplishing, and what folks out there think you are achieving and accomplishing, is so great as for most U.S. civil servants. I’m not sure what my sympathy will buy – especially for those employees who really can’t afford furlough-induced pay cuts. But I want to express it anyway.
At the same time, this wouldn’t be my blog, and Steve wouldn’t be Steve, if I didn’t also discuss this in a managerial challenge context. I think agencies need to be ready for the likelihood that sequestration itself will last for a while, and that, even more importantly, tight agency budgets will last for a very long time even after the sequester is "fixed."
In this situation, as far as personnel expenses (S&E in government budget lingo) are concerned, agencies simply must look for alternatives to furloughs for wide swaths of staff. Organizations, and managers, will need to start – and should be starting now, on the assumption this fiscal environment is not going away – thinking more strategically about how to bring down personnel costs.
For managers and the human resources system, this means becoming more serious about taking on poor performers. For organizations, this means making tough choices about units that need to downsize or even be eliminated.
Most federal managers will say that they could absorb a 10 percent personnel cost cutback without too much impact, if they could choose how to take it – that is, by getting rid of poor performers. Needless to say, in the real world of federal personnel law, this is incredibly easier to say than to do. In this environment, some federal managers will be willing to endure the hassle, but probably some system changes are needed to help managers who would like to act.
With hiring declining in this environment, shouldn’t there be some HR staff resources that can be freed up to help managers with the process of getting poor performers to shape up or ship out? Isn’t this a time for OPM to examine its regulations in this area to see how much the process can be streamlined and deregulated without statutory change?
The bottom line is that the alternative to dealing with poor performers is to have the brunt of the cutbacks fall on good performers. This is wrong morally, and it increases the organizational performance penalty from the cutbacks.
A second alternative to furloughing a lot of people is a smaller number of Reductions in Force. RIFs reflect the reality of a permanently tighter budget environment. The heads of units need to start looking for ways to re-engineer business processes to reduce unnecessary steps or in other ways take out staff requirements. Higher-level managers need to ask whether there are whole units that, in this environment, simply can’t be justified and should be eliminated. Again, keep in mind that the alternative is worse: an unfair, impossible world of furloughs.
Posted on Feb 28, 2013 at 3:21 PM4 comments