Effective outcomes-based commissioning Social Impact Investment Task-force established by G8 Stephen Brien, 19 th Feb

1. Effective outcomes-based commissioning Social Impact Investment Task-force established by G8 Stephen Brien, 19th February 2014

2. Commissioning for Social Impact Investmentstarts with a value equation Pay for Outcomes Contract • Outcome funders • Government Commissioning Body ImpactValue Equation Impact venture intermediary • Sources of Finance • Sources of Funding • Policy Alignment • Motivation • Interest in target pop • Target Outcomes • Financial vs. social return • Financial Alignment • Approval • Savings Realisation • Commissioning Body • Stakeholder Engagement • Aligning Funders • Commissioning Strategy • Delivery Models • Attribution of outcomes • Value-Creation • Innovation • Risk Management • Contracting • Raising capital • Resource Allocation • Adding value • Performance mgmt • Investor’s motivation • Social vsfinance first • Interest in social issue • Confidence in mechanism • Risk profile and target financial return • Managing timeline and commitment • Pre-committed vs best efforts • Cost per successful intervention • Net cash impact / social value • Returns to each party • Value of innovation Contract Design • Information Quality • Referral of target population • Intervention Flexibility • Contract Structure Delivery Bodies Outcome Measurement • Intervention model • Cost per intervention • Innovation • Delivery Success • Outcome Payment metrics • Performance Benchmark • Measuring body • Performance Data Gathering • Evaluation

3. Challenge varies depending on the nature of the Social Impact Investment Case Studies – UK Social Impact Bonds Peterborough Rehabilitation • Weak evidence on potential for performance improvement • Overall data void • Pricing – Triangulation of Value vs. Cost + Return to investors • Accounting for full value of outcomes (across departments) • Required external outcome funder (BLF) • Long payment delays due to scale of cohorts • (Policy instability) Essex Children on the Edge of Care • Commissioner learning curve – and time • Well evidenced intervention model with historic success rate • VfM case needed to focus on management effectiveness • Re-engineering of commissioner processes • To allow data sharing • Social Impact Funds shielded foundations from some investment complexities • Although range of investor expectations DWP Youth Unemployment (PEF / Tomorrow’s People) • Commissioner Initiated • Pricing – Tariff from commissioner • Long-term intangible benefits needed to be quantified • Outcome measurements not extant • Value equation not favourable to delivery body without subsidy • Prescription / Constraints on Delivery body IAAM – Adoption • Venture intermediary – initiated • Pricing – tariff from providers • Scale play - Providing a nationwide solution • Spot purchase – not cohort • Returns dependent on take-up • Delivery Providers taking some of the risk - communally

4. Impact Value Equation must work for both parties For the Commissioner For the Venture Intermediary Expected level of outcome is better than today Price / successful outcome < Value of outcome Downside risk is manageable Reputation Additional cost of handling delivery failure Upside risk is manageable Cash cost of success is available Cost of capital acceptable Share of upside equitable Expected level of outcomes is achievable Price / successful outcome > Cost of successful outcome Surplus is enough to cover costs (including set-up and measurement) and deliver return to investors Downside risk is manageable Investors are comfortable with downside Upside opportunity is sufficient Investors have enough potential upside to warrant the risk Political / commissioning uncertainty is manageable • Requires an unambiguously positive outcome (sufficient to be documented) that matters to both commissioners and investors,

5. How the Impact Value Equation works Essex Children on Edge Of Care IAAM - Adoption Expected Outcome • ~30% of at-risk cases diverted from going into care • From a cohort of 380 • 90%+ of cases resulting in successful adoptions Payment for successful Outcome • ~£7m total • £54k per outcome Value of outcomes • ~£17m total • Net savings = £10m • ~£150k per outcome • Net savings ~£100k per unit Cost of interventions • ~£5.5m • £3.1m (Capital) + recycled outcome payments • £46k per intervention Return to investors • Target return 8%-12%pa • Fixed yield of 4% • With expected outcome payments, target 8%-12% pa

6. Commissioners have to break the mould of procurement Commissioning Body Engaging Stakeholders Value Creation Risk Management • Ensuring the risk of failure is understood • Addressing internal concerns • Willingness to allow for some failure • Trading off innovation vs. track-record • Managing reputational risk • Corporate and personal • Ensuring financial risk is transferred appropriately • Establishing a mechanism to protect against delivery failure – where necessary • Managing the sign-off process • Government Departments • Local Government • International Aid Agencies • (Health) Insurance Fund • Others • Openness to ideas from the outside • Securing and aligning sources of outcome funding • Securing resources to support the contracting process • Especially Legal fees • Securing political support to cut through complexities • Nurturing the provider / intermediary market • Is there a market to commission from? • Addressing procurement constraints • Competitive tender? • Innovation exemption? • Identifying how value is being created • Risk transfer, • Innovation in service delivery • Systematic best practice • Performance management • Establishing value-for-money case • Ensuring required internal transformation also takes place to support delivery • Plan for using the savings • Recycled into related preventative measures • Returned to departmental central funds? • Commissioners need to adopt more of an innovation/problem-solving mindset • Simplification and standardisation key to cutting the required development time

7. Outcome funding requires policy and financial alignment Sources of Funding Policy Alignment Financial Alignment • Departmental Budgets • Govt Corporate Centre • Treasury • Cabinet Office • Local Government Budgets • Foundations • E.g. BLF • Corporate Sponsors • Ensuring Political Priority for the social impact • Shift to paying for an outcome, rather than funding an activity • Recognition of under-investment vs. social optimum • Value of outcomes understood • and evidenced where possible • Clearly defined target population • Outcome simple enough to be contractible • And target the desired behaviour • Securing enough outcome funders to cover the range of social value • Aligning the objectives of outcome funders • Securing spending approvals • Outcome payments budgeted for • Savings/Value-realisation plan in place • Avoiding back-filling • Could departmental innovation funds help unblock resources now? • Are impact accounting standards needed to measure value?

8. Process of designing the contract requires an ‘agile’ iterative approach Evidence Base Impact Definition Contract Structure • Sourcing the data required to establish the contract • Referral rates • Outcomes • Costs • Consequential costs on rest of system • Secondary impacts • Agreeing the baseline for impact – and the required data to support it. • Isolating impact of external factors • Size of target population • Likelihood of outcome • Creating a clear definition of target population • Robust process for service provider to access them • Agreeing an objective and transparent outcome definition • Binary vs. proportional metric • Avoid undesired gaming • Agreeing the concept and definition of additionality • Agreeing the timing and scale of the contract • Ensuring is it long enough to deliver on investment, staff training and innovation • Large enough to deliver scale benefits • Agreeing payment timing and contingency • Intermediate payments • Impact on commissioner balance sheet • Agreeing the level of prescription/constraints around delivery • Accounting for regulatory regimes, etc • Agreeing the level of reporting to commissioners

9. Outcome Measurementis a technical challenge, driven by policy objectives • Outcome Payment metrics • Ensuring metrics are measurable and transparent • Performance Data Gathering • Ensuring there is a suitable data-feed for the outcome metric already exist • Determining the appropriate lag between intervention and outcome measurement • Performance Benchmark • Ensure attribution considered and managed • Counterfactual (Historic performance, Propensity Score Modeling, RCTs) • Measuring body • Determining who assesses the outcomes and additionality • One party, collective endeavour or third parties • Ensuring the measurement cost is embedded in the management costs • Evaluation • Agreeing the required level • Providing investors with broader outcome perspective • Fostering innovation

10. Venture Intermediaries are useful to catalyse the process . . . • Contracting • Contracting with commissioners • Negotiating impact value-equation • Interfacing between commissioners and investors • Managing different perceptions of risk/reward trade-off • Raising capital • Securing sources of finance • Managing different concerns of stakeholders • Creating a simple enough financial proposition • Resource Allocation • Identifying right portfolio of delivery capacity – with renewal / share shift components • Contracting with delivery partners – to provide up-front capital and appropriate rewards for successful performance • Integrating service providers, where necessary • Adding value / performance management • Adding value through performance management and support to the delivery partners • Establishing the appropriate vehicle for managing the relationship between commissioner, investors and delivery partners • Integrating Management Information • Agreeing governance between parties through the contract period

11. . . . They identify progressive investors . . . • Investors motivation • Interest in social issue • Fit with investor’s purpose – innovation vs. growth etc – is it transformative enough • Reluctance to be financing government • Confidence in mechanism • Lack of dedicated social fund managers to give comfort on investment • Complexity of details • Need for an intermediary • Risk profile and target financial return • Social first vs. finance first • Comparison with stable investment for foundations • Required return, given risk, for other investors • Role of a capital stack • Managing timeline and commitment • Willingness to pre-commit • Being patient with the set-up timeline • Balancing objectives with those of other investors

12. . . . And delivery bodies whose management supports innovation and scale • Intervention model • Developing suitable interventions and how to tailor it • Innovating for outcomes • Developing culture of continuous improvement • Cost per intervention • Deepening deeper understanding of cost base, and its drivers • Demonstrating control over cost base • Flexibility to innovate • Avoiding staff transfer from existing service provision • Minimising commissioner prescription • Delivery Success • Analysing success rates – and risk profiles • Working to a more rigorous tempo – re cohort referrals • Developing more resilient business models – managing volatility of flow • Being comfortable with more performance management

13. Summary • Commissioning for Social Impact Investment starts with a value equation • Challenge varies depending on the nature of the Social Impact Investment • Impact Value Equation must work for both parties • Commissioners have to break the mould of procurement • Outcome funding requires policy and financial alignment • Process of designing the contract requires an ‘agile’ iterative approach • Outcome Measurement is a technical challenge, driven by policy objectives • Venture Intermediaries are useful to catalyse the process . . • . . . They identify progressive investors . . . • . . . and delivery bodies whose management supports innovation and scale