By Hanna Azemati • November 5, 2018

This post originally appeared on Stephen Goldsmith's Better Faster Cheaper column on Governing.com. 

Governments often view performance-based contracting as a north star. But while paying for performance can streamline incentives for public works or technology, it can backfire for social services. That's because determining the impact of social programs and therefore paying for true performance is complex. Instead, governments should focus on reorienting their management of contracts toward outcomes.

Take the example of a workforce-development contract, which typically pays for the number of clients receiving services. With a performance-based contract, government might instead pay based on how many clients are placed into jobs. But if performance is assessed without a rigorous evaluation, it could lead the provider to prioritize activities that are most likely to result in immediate job placement even though first tackling barriers such as substance abuse could improve prospects for sustainable, long-term employment. Perhaps worse, the provider could feel pressure to serve clients who are the easier to place into jobs instead of those most in need of help.

Misaligned incentives between the public and nonprofit sectors are not the primary reason why progress on social challenges is slow. Rather, success is limited by the meager supply of evidence-based program models and varying quality of program implementation. Government-provider interactions tend to be dominated by compliance issues, with little mandate or time for jointly tackling performance issues.

Paying for performance will not solve these challenges. Instead, governments need to change how they procure and manage their contracts. Strategically planning for social-service procurements is a critical first step that governments often skip. That involves analyzing historical data to identify at-risk populations, understand their needs and specify appropriate and realistic goals. When procuring for services, governments should leave room for providers to propose new interventions and aim for a continuum of programs with minimal gaps and overlaps in geography, clients and needs to be served. And for issue areas lacking evidence-based programs, funding should be set aside for evaluation.

During the contract term, government and providers should regularly review actionable data to understand the barriers facing clients as well as progress toward the goals established for the target population. They should also flag emerging opportunities and challenges, including shortfalls in referrals, enrollments or program completion of clients who most need services. Through frequent outcomes-oriented meetings, the government and the provider can then discuss performance challenges and devise solutions. Close coordination is particularly key for helping at-risk clients, who often deal with multiple providers and government agencies, to smoothly navigate the system and access the most appropriate services.

At the Government Performance Lab, we refer to these approaches as "results-driven contracting" and "active contract management." In some cases, carefully structured performance-based payments can supplement -- but not substitute for -- these strategies. There are three ways to structure performance-based payments to avoid the aforementioned risks (note that for each of these options, the portion of payment that is not tied to performance is made as usual based on the number of people served): 1) using very small performance-based payments to get parties to collect more accurate data and have conversations about it without distorting the focus of service delivery; 2) tying payments to a process rather than an outcome to increase attention on activities with potential to improve long-term outcomes, such as follow-up with clients after service completion; and 3) structuring payments to explicitly reward the provider for producing desired outcomes for the intended population.

San Francisco's contracts with one comprehensive and six neighborhood access points for workforce-development services demonstrates the first and third of these methods: A small portion of payment -- only 2 percent -- is linked to placing clients with barriers, such as a criminal record, disabilities or limited English proficiency, into jobs that pay more than minimum wage; another 2 percent is tied to getting any client a job, while the remaining 96 percent is disbursed based on the number of clients served.

In the first year of the new contracts, providers placed 55 high-risk individuals into jobs that on average pay $23 per hour; 80 percent of those jobs also provide benefits. By generating data on the number of high-risk individuals being placed into jobs, the performance-based contract is enabling San Francisco to track providers' progress over time as well as more actively collaborate with providers to improve outcomes for high-risk clients most in need of support while continuing to serve all San Franciscans in need of a job.

Governments are drawn to performance-based contracting because it seems a promising path to achieving desired outcomes. But if not carefully structured, such approaches can introduce counterproductive incentives and distract from the real work it takes to successfully turn around the lives of at-risk populations: setting out clear goals, continuously evaluating progress, and persistently and collaboratively using data to engage with providers and manage toward goals.