Creating a Silicon Valley for the Social Sector: Q&A with Jonty Olliff-Cooper
Jonty Olliff-Cooper spends a lot of time thinking about new and innovative ways of delivering public services to low-income populations — in ways that are more responsive, cost-effective, and scalable. To that end, he’s a big proponent of relatively new payment models whereby governments compensate providers based on outcomes instead of upfront. One promising example of these payment-by-results programs is the impact bond, an emerging financial instrument that resembles the venture capital model: private investors supply working capital to service providers in the hopes of profiting if goals are met.
Why has it been so difficult to create markets for social innovation?
Climate change economists have worked hard to get people to understand there’s a cost to not acting on climate change. We, on the other hand, haven’t done so well when it comes to understanding the costs of under-educating people or allowing underemployment or allowing ill health, and so on. We need to change the way the public and the press and the government see the cost of not improving public services and try to price that action.
To set up the right incentives, you really need to create the financial structures where it makes sense to do social innovation. Traditional approaches to funding often end up providing a lot of tiny grants that aren’t going to really move the needle on the size of problems we’re trying to deal with.
There are a variety of approaches to market shaping in the social sector. Some people are excited about prize-based ways of doing it, like the XPRIZE. Another approach is what we call payment-by-results programs, which we see a lot of in the United Kingdom, Australia, and New Zealand, and to a lesser extent, in Canada and France. A third approach is the impact bond, which isn’t a bond in the traditional sense. In an impact bond, a government body and various private or charitable entities partner to fund, manage, and deliver social services, with payments contingent on the results achieved. These are all different approaches to the same big question: How do we fund social innovation? Creating a market that rewards great social innovation is, I think, the social sector’s Manhattan Project.
You’ve been a policy expert on public and social sector issues for more than a decade. You’ve also been at the forefront of the move toward payment-by-results programs in general and impact bonds specifically. Can you share your experiences in this area?
I first worked on payment-by-results models — also referred to as “payment for success” — in 2008. I was helping to draft policies for the Conservative Party under David Cameron before he became prime minister. In 2010, I joined Action for Employment, which was one of the pioneers of the PBR model, as its director of strategy and policy. There, I worked extensively on the design and delivery of a massive U.K. government program to help long-term unemployed people into jobs. At the time, this welfare-to-work program was probably the world’s largest-ever PBR scheme in social policy. In 2018, I spent time as a technical adviser to the Education Outcomes Fund, which is looking to raise $1 billion from government aid agencies, foundations, and corporates to create, fund, and manage a portfolio of impact bonds for education across Africa and the Middle East. It is run by Sir Ronald Cohen, a fascinating man who founded Apax Partners and was the driving force behind the first impact bonds about a decade ago.
Why are pay-by-results models so attractive?
The two biggest advantages are that they drive innovation and improvements in the quality of service. Because you only pay for outcomes, you incentivize quality. Instead of saying, “I can give you $100 to do this work, and it doesn’t matter if you do well or not,” you can say to somebody, “I’ll give you $200 if you do a good job.” Providers get working capital, either from the government or investors. Funders have the opportunity to recover their investment plus a return. And since governments are no longer funding things that don’t work, they have more money to pay for things that do work.
This model is attractive for providers because they’re going to get more money if they deliver results, and it allows them much more freedom in how they design their services.
At the same time, the model is complex, and governments face a lot of barriers in implementation. For example, you’ve got to get the pricing right. If you pay too little, the providers can try their best, but they might not earn enough to cover their costs, and the market will die. It you pay too much, then the provider is going to make a lot of profit, but it’s probably not a very good value for the taxpayer. So, you need a lot of precision.
Let’s talk social impact bonds — and, specifically, the Education Outcomes Fund you just mentioned. You’ve described the fund as a potential game-changer.
There’s an acute youth education crisis brewing in Africa and the Middle East, which demands a large, coordinated response. Sir Cohen’s idea is to create one of the largest outcome funds ever attempted that not only addresses the problem, but also overcomes some of the challenges of constructing impact bonds.
PBRs, and impact bonds especially, are currently seen as arcane, complex instruments that work but are usable only in limited circumstances. In the last 10 years, we’ve seen a lot of small experiments with these models. Part of the reason for that is that set-up costs are quite high. If it costs $1 million to start an impact bond of $500,000, that looks terrible. But if you do an impact bond (or, in this case, a fund which sets up multiple smaller impact bonds) of $1 billion, then the set-up costs become much more manageable.
The Education Outcomes Fund is not a little toe in the water. It is an effort to show that impact bonds can work on a really big scale. If it reaches its fundraising goals, the fund will serve as an intermediary, managing all of the impact bond players: governments and education providers that will deliver the results; smaller investors and lenders that provide the working capital upfront in exchange for a target return of, say, 5 to 10 percent; and government aid agencies like USAID and the U.K.’s Department for International Development that will pay providers when results are achieved. The fund will pool the money and expertise, set payment goals for different levels of educational attainment, bring stakeholders together to launch the bond, and evaluate and pay for results.
People liken this to the venture capital model. Providers are the startups, but the risk-takers are really the VCs who pick them, coach them, fund them, and in return, take shares. So, economies of scale in the impact bond market is also about having an intermediary that can coordinate the moving parts and create a centralized center of expertise.
If this fund succeeds, the implications go beyond education, beyond Africa or the Middle East. It could be world changing.
Payment-by-results programs aside, how do you think governments could do a better job of providing services to the public?
The question of how to change people’s lives is really important. Three directions hold a lot of promise. One is data. A lot of social justice–focused government is about trying to predict, prevent, or cost problems, or track what is working to solve them. Most governments have barely begun to scratch the surface of how data science can help them do this. They also hold enormous datasets, but usually in separate systems, categorized in separate ways, in separate ministries. Unifying, cleaning, and analyzing this data could provide a breakthrough in our understanding of how poverty begins, evolves, and can be solved.
Imagine what we could do by analyzing employment, education, and tax records together to show that for a person like you, a specific type of training will produce an “x” percent likelihood you will earn well. Or, imagine if we could, with much greater ease, predict which people in prison need support to go clean. It would be a game changer.
The second direction that excites me is deploying design thinking in government. Nowhere is there a bigger gulf between the people who create something and the people who use it than in government services. Public services are often run by people who don’t have any experience with the services. I’ve never been homeless, yet I’ve worked on homelessness. Young people work on aging. People who went to great schools work on improving bad schools. People who have never been in prison run justice policy. The techniques of design thinking can be powerful in bringing the real experience of people who use government into policy making, which will improve the quality of public services.
What are your thoughts on the role that the Golub Capital Social Impact Lab can play in social innovation?
There are technical components in how you design markets carefully where I think there could be a fruitful union of academic economists with the designers of PBR programs. By and large, the United States is not a world leader in innovation in public services. So trying to get U.S. government leaders to adopt some of these more Silicon Valley ways of thinking would be valuable.
Today, you need many disciplines to come together to design excellent services — data scientists, ethnographers, design thinkers, political experts, behavioral economists, entrepreneurs, social psychologists, financial experts, and academic evaluators. I can’t think of a single organization in the world other than Stanford that has all these components to design amazing 21st century public services. The Golub Capital Social Impact Lab can play a unique role.
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Learn more about the Golub Capital Social Impact Lab at Stanford Graduate School of Business.
Follow us @GSBsiLab.
Learn more about Jonty Olliff-Cooper.
With writing help from Krysten Crawford.
