Adopting a performance management system doesn’t improve performance by default, as underscored in a research paper published earlier this month by Ed Gerrish of the University of South Dakota.

Performance management is most effective when organizations stick to best practices in program implementation, identify rigorous outcomes, and make those outcomes the focus of the intervention. These principles may seem obvious, but the reality is that they rarely guide actual performance.

What will it take to change government culture to adhere to these guidelines? We need a disruptive tool to change the status quo and shift performance management from a box-checking exercise to a meaningful way of thinking about how governments can have greater impact. Pay for success (PFS) financing could be that solution.

Pay for Success is a new innovation in public sector financing, PFS facilitates private investment in evidence-based social programs. The investors’ principal is returned with a profit only if rigorous evaluation finds that predetermined performance goals are met. Thus, PFS is a potential catalyst to improve government performance. 

Socially minded investors see their investments leveraged, governments pay only for outcomes, and social service providers receive capital to create new infrastructure to better serve their clients.

How can PFS improve government performance?

The process itself is a critical systems reform. Governments identify the people and places that consume disproportionate resources, and the obstacles that have impeded their ability to serve those populations in the past. Social service providers share evidence of their success in working with those populations, and how these strategies and best practices could possibly make a bigger, measurable impact.

The engagement of a diverse set of stakeholders amplifies these benefits. Pressure from investors may compel providers to improve service quality and to identify attainable goals and realistic evaluation frameworks. PFS serves both as a platform for launching research-based programs while providing “guiderails” to minimize drift away from core performance principles.

Many jurisdictions that are interested in PFS may ultimately decide that the model is not right for them. However, they will nonetheless benefit from the introspection and emphasis on key principles that the PFS process brings.

PFS requires governments to take a hard look at investments currently focused on good works rather than good evidence, the (in)adequacy of existing practices to yield sustainable improvements, the limitations of siloed funding structures, and the critical distinction between outputs and outcomes.

All of this requires a major shift in thinking. We believe PFS potentially offers a promising avenue for advancing a science-based agenda for public policy, grounded in evidence and implemented with rigor and transparency. As Tracy Palandjian and Jeff Shumway of Social Finance observed, “Success in PFS… runs deeper than finance. Success is about changing the way governments think about contracting for services.”