Advancing Mobility with Pay for Success

Tracy Palandjian is Co-Founder and CEO of Social Finance, an impact investing nonprofit dedicated to mobilizing capital to drive social progress.

For more than a decade, Tracy has committed to reimagining the role of the capital markets in service of society. Inspired by Social Finance UK, Tracy co-founded Social Finance in Boston in 2011 to build the Pay for Success field in the U.S. She currently serves as Vice Chair of the U.S. Impact Investing Alliance, among other civic leadership roles.

Prior to Social Finance, Tracy was a Managing Director at The Parthenon Group where she established and led the Non-Profit Practice. Tracy also worked at Wellington Management Co. and McKinsey & Co.

A native of Hong Kong, Tracy chose to stay after college and build a life in America. She holds a B.A. from Harvard College and an M.B.A. from Harvard Business School where she was a Baker Scholar.

Despite being among the world’s most advanced nations, the U.S. is leaving millions of people behind. Persistent challenges – multi-generational poverty, chronic disease, mass incarceration – afflict communities with devastating effects. COVID-19 has exacerbated social needs and highlighted entrenched inequities that disproportionately burden people of color.

Failure to solve these challenges stems largely from how we fund social programs. Funding is often directed to organizations out of inertia, anecdotes, and networks. Rarely are public and philanthropic dollars allocated based on program evidence or tracked to see if they made a difference.

Social Finance aims to transform the system around how we invest in human potential by creating and guiding new cross-sector partnerships. Pay for Success strategies direct funding toward outcomes – rather than outputs – to deliver measurable and lasting societal change. By building enduring partnerships around evidence and accountability, we strive to elevate humanity systematically and at scale.

We see this system failure acutely in the area of economic mobility, where outputs (like hours of training) determine workforce funding instead of outcomes (like job attainment). Risks are also borne by those least able to do so, contributing to the $1.6 trillion student debt crisis.

The challenge is expanding. While nearly all children went on to earn more than their parents 50 years ago, only half born after 1980 will. Financial insecurity has exacerbated as wages stagnate while costs of basic needs rise. Over a third of Americans can’t come up with $400 in an emergency. COVID-19 has intensified economic instability, especially for Black and Latinx communities.

The scale of the problem was already enormous. Over 50 million Americans are low-wage workers who face regular financial stress. Overlapping this group are the 70 million who only have a high school diploma; 30 million in jobs with high risk of displacement; and 30 million with some college but no degree and often student debt. Since March, over 40 million people have become unemployed. Many lack a viable pathway up the economic ladder. 

The American Dream is fading. With a protracted COVID-19 recovery, it's unlikely to be revived without intervention.

Pay for Success (PFS) is a set of innovative impact investing strategies that direct dollars to outcomes rather than outputs. PFS brings uncommon partners together around a common purpose – aligning incentives and risks – to drive measurable results at the scale of today’s social challenges. 

After nearly a decade of building the Social Impact Bond field, we developed the Career Impact Bond (CIB) to advance economic mobility. CIBs empower low-income individuals to enroll in job training programs at no upfront cost and secure careers in recession-resilient industries in the new economy, such as IT and health care. Impact investors cover their tuition. Unlike a loan, though, CIBs tie repayment to job success: Students repay costs as a percentage of their future income only if they find jobs paying above an income threshold. Repayment is capped at a certain dollar amount and duration to ensure student protections. 

Partnering with effective training providers, we are scaling CIBs through two funding vehicles. Our UP Fund is a $40+ million impact investment fund that will repay investors based on student outcomes. Our pay-it-forward funds will be seeded by government and philanthropy and recycle student repayments to sustainably train the workforce of the future. 

Our goal is to use Career Impact Bonds to rapidly skill people nationwide who face barriers to accessing high quality job training programs, with an emphasis on low-income individuals and people of color. Often these programs are out of reach because of cost and a lack of reasonable financing options. 

CIBs will prepare people for the 55% of jobs in the labor force that do not require a college degree, in growing industries such as IT, skilled trades, and allied health. Graduates will secure jobs that pay higher wages than their previous jobs and put them on pathways to economic stability. 

To ensure CIBs reflect students’ interests, we conducted focus groups with students in training programs and will continue to partner with providers to capture student and worker insights. In particular, we will intentionally amplify the voices of people who are impacted by systemic racism.

CIBs will help thousands of people attend high-quality skilling programs and secure jobs in recession-resistant industries. A recent CIB graduate illustrates the power of the model: The student, previously locked out of training due to poor credit, graduated from a coding bootcamp and secured a Cloud Developer job earning $68,000.

Pay for Success strategies, including Career Impact Bonds, expand economic opportunities for those who have been traditionally left behind. CIBs remove longstanding barriers to training and respond to the future of work by placing workers at the center, enabling low-income individuals and people of color to gain relevant skills and stay nimble in the new and evolving economy – with the opportunity to secure higher wages and achieve economic mobility. By tapping private capital and public funding, CIBs will support students in a sustainable way to meet the scale of the challenge, contributing to an equitable recovery from the pandemic.

In 2011, I co-founded Social Finance with David Blood (Generation Investment Management) and Sir Ronald Cohen (author of “Impact: Reshaping Capitalism to Drive Real Change”) to launch the Pay for Success field in the U.S. A year earlier, Social Finance UK had launched the world’s first PFS project, a Social Impact Bond challenging the status quo in how we finance social change.

When we opened our doors in Boston, our founding vision was to adapt the UK experiment and to articulate the core principles of PFS around outcomes, data-driven decisions, and governance and accountability, applying them in the American context. I saw PFS as an idea with huge potential: Building on parallel movements already gaining traction – “Moneyball for Government”, impact investing, evidence-based practice – PFS enlists private capital for public good, aligning cross-sector stakeholders to move the needle on intractable challenges.

Since our founding, we have grown from a scrappy start-up to a mid-sized firm. We have seen the impact of PFS at work across diverse social challenges, and are now at a tipping point to take the model to scale. Especially in the current pandemic, we are invigorated to use PFS to contribute to an equitable recovery.

My upbringing in Hong Kong, a strongly capitalist society, has motivated my passion for this cross-sector, multi-disciplinary work. I have always believed that business can be a force for good, markets can drive shared prosperity, and capitalism remains the best economic system. It has helped lift billions out of poverty and driven innovations that have raised living standards everywhere. 

Yet, capitalism has many flaws and challenging consequences. Wealth and economic growth have not been broadly shared; inequality by every measure has significantly widened. 

How do we harness the best of capitalism – the discipline and rigor of markets – in service of the public good? I believe impact investing is a key part of the solution. 

Pay for Success is a unique impact investing strategy. By enlisting the capital markets to realign funding and reallocate risks, PFS invests in human potential and lifts up those who have been traditionally left behind. Now, as the American Dream continues to slip away, Career Impact Bonds can rewire the incentives in our workforce system to create pathways to economic mobility for everyone. While Social Finance has made much progress in charting a new path, I remain restless. Our work is only just beginning.

My background in finance and strategy consulting and my civic engagement work have prepared me for the multi-sectoral work of Pay for Success. After business school, I worked in asset management and experienced the power and breadth of the capital markets. For the following 12 years, I built and ran the Non-Profit Practice at The Parthenon Group, a management consulting firm. Working with leading philanthropies and grassroots organizations, I saw the same problem repeatedly – the most competent nonprofits were not always the best fundraisers, and the best storytellers did not always run the most effective programs. As an advisor to government, I saw the fiscal constraints our officials face in launching new interventions to make our safety nets more effective. These experiences inform my work daily.

More than anything, though, I am well positioned to deliver this project because of our team. Our staff of 60+ brings experience from government and leading nonprofit, financial, consulting, and legal firms. They are some of the most purpose-driven and capable individuals with whom I have worked, and they show up every day with a deep commitment to excellence, collaboration, and impact. Growing from a small start-up to a mid-sized organization in a new field has been far from easy. Our team has been nimble in the face of challenges and has exhibited creativity, grit, and resilience to advance our mission. Our greatest asset is our people, and I am proud of the team we have built over the last decade.

The journey of bringing Pay for Success to the U.S. was fraught with obstacles. In 2011, PFS was unheard of. We had to build a new product and ecosystem around it – without templates or frameworks to lean on – while we were building a new firm. Each stakeholder – government, investors, and nonprofits – had to be educated on how PFS works and convinced to collaborate with uncommon partners. Early adopters had to trust us to try a radically new approach. We worked steadily – with myriad ups and downs – for almost three years before launching our first project. 

Despite these challenges, we succeeded in building a new field from scratch. We worked tirelessly across sectors to elevate the idea, bring some of the first projects to fruition, and create a supportive ecosystem. We overcame partisan gridlock to shape historic federal legislation and see its passage in 2018 (the Social Impact Partnerships to Pay for Results Act) and have launched PFS projects in red and blue states. Our success is due in part to our persistence but also the intersection of PFS with larger movements, including government accountability, impact investing, and data and evidence in the social sector.

I was a foreign student in the U.S., a freshman in college, when my father passed away suddenly from a heart attack. My mother was heartbroken, and I was very concerned about leaving my brothers – who were 11 and 12 – in Hong Kong. I ultimately decided to bring them to the U.S. with me and set them up in local schools. In a way, I took on the role of head of family, assuming parental and other family responsibilities. My strong sense of duty in the Chinese tradition and drive to action kept me going during this difficult time. I am proud that my brothers went on to do well in life, and we remain extremely close despite my choosing to stay in America while they returned to build lives in Hong Kong. To this day, this has been my greatest accomplishment.

At Social Finance, I bring the same perseverance and sense of duty to our team and mission. I strive to realize the team’s potential so they can fulfill the potential of the people we serve. I am energized by our impact and have never felt more compelled to take our work to the next level.

Pay for Success is an innovation built on existing innovations: It combines and adapts powerful movements – impact investing, government accountability, evidence-based practice – into a refreshed model poised to drive impact at scale. The approach motivates projects that are:

• Informed by data. PFS realizes the opportunity to use data and evidence – from cost-benefit analyses to performance management – to drive decision-making and fuel results. For example, we’re collaborating with Burning Glass and Emsi to capture on-the-ground skills gaps and employer needs as labor markets shift in real-time.
• Oriented around outcomes. PFS elevates the use of performance-based contracts, focusing on outcomes not outputs. Rather than evaluating training programs by number served, we gauge success by whether students secure well-paying jobs. Uniquely, PFS brings greater impact to impact investing – whereas most impact investments repay investors based on business success, PFS repays based on actual lives improved.
• Collaborative. Projects unite uncommon parties around common goals. They transcend traditional siloes, connecting nonprofits with unprecedented access to capital markets and facilitating handoffs between government and nonprofits.
• Poised for scale. Each project supports hundreds to thousands of individuals. Despite being a recent innovation, the global PFS market has mobilized half a billion dollars to support 2 million people across 200 projects.
• Sustainable. PFS taps capital markets to address social challenges, adding a new and sustainable funding source to nonprofits, traditionally fueled by philanthropy and government.

Ultimately, our intention is for PFS to change practices across sectors, motivating smarter investments in human potential.

Social Finance’s mission is to mobilize capital to drive social progress. Our theory of change is depicted below.

Our theory of change assumes that our Pay for Success projects will drive a mindset shift from outputs to outcomes across stakeholders; more efficient systems of funding; and the most effective interventions being continuously improved and delivered at scale. We have already begun to see these changes in the projects we have launched to date. Ultimately, our work will lead to a more resilient and inclusive future for all to thrive.

We also developed a specific theory of change for our Career Impact Bond across stakeholders: 

• Students will enroll in CIBs and enter training programs. As a result, they will gain skills needed to succeed in employment, and obtain jobs with higher salaries and growth potential.
• Providers will receive capital to expand their services, recruit students from new target populations, and improve their ability to track program impact. As a result, they will increase their capacity to train students, and use data to continuously improve program outcomes over time.
• Employers will see new talent from CIBs. As a result, they will have a larger pool of diverse applicants to fulfill their hiring needs and remain competitive.
• Governments will supply capital for our pay-it-forward funds. As a result, more people within their jurisdictions will have access to skilling programs, and they will support their local labor markets.

Over the long term, these changes will lead to improved outcomes in economic mobility and career pathways for tens of thousands of students – but they do more than that. They bring new capital to the education and training sector, incentivize providers to work toward outcomes, and forge a new way of financing skills-building where vulnerable people do not bear the risk. In addition to creating and guiding these partnerships, we are also focused on building a field. We conduct market education activities through policy advocacy, publications, speaking engagements, and convenings to share learnings and contribute to field building. Ultimately, our vision is a new paradigm for training finance that places worker outcomes at the center.

Since our founding, we have directly served nearly 40,000 individuals and family members through Pay for Success projects. Today, our active impact bond projects are designed to serve a total of 23,000. These projects take place over multiple years, some of which will end within the next 12 months and others which will extend over a longer timeframe. Our projects have helped, for example:

• low-income mothers and newborns receive home-visits from nurses;
• adults on probation obtain holistic services to support their reentry; and
• immigrants and refugees access language and workforce programs to prepare them for better jobs.

In one year, we will launch new projects to directly improve the lives of an additional 4,500 people. Over the next five years, we will launch new projects to serve 25,000 more people.

In addition to those whom we serve directly, our impact has ripples:

• Future workers. Through our pay-it-forward funds, we are setting up a system that will have impact in perpetuity – as funds get recycled, more students can access training. With CIBs and these funds, we are creating a cycle of supply and demand that lays a foundation to sustainably impact hundreds of thousands of people.
• Systems impact. By sharing our learnings, we hope to inspire stakeholders across sectors to embrace and replicate our tools and their core principles. In addition, we are committed to advocating for regulations in the income-share agreement (ISA) space to ensure student impact. Thus, we hope to benefit hundreds of thousands additional people.

We are invigorated in the current moment to use Pay for Success to accelerate an equitable recovery post-COVID-19. In particular, Career Impact Bonds can support the tens of millions of displaced workers, address other disparities and vulnerabilities laid bare by COVID-19, and strengthen and build the workforce of the future. 

Next year, we will use CIBs to help:

• students who previously faced barriers to enroll in job training;
• providers to expand their markets to new populations; and
• employers to access diverse talent with in-demand skills.

We will achieve these goals by structuring CIBs, matching hotspots of job growth with strong programs, deploying our investment fund, and raising pay-it-forward funds to sustainably support new students.

Within five years, we aim to fundamentally change the paradigm of financing reskilling and upskilling. We anticipate that our CIBs will help:

• students to gain skills and enter careers with long-term income growth;
• providers to expand access to their programs;
• employers to have a steady stream of skilled talent; and
• governments to build a stronger workforce to meet evolving economic needs.

We will achieve these goals by scaling the CIB model, continuing to enroll historically underserved people, and raising public and private pay-it-forward funds.

We’ll also work to scale CIBs’ impact by building a robust field, sharing our learnings, and inspiring others to adopt our impact-first model. For example, in 2021 we plan to release a publication in partnership with three Federal Reserve Banks on innovative, high accountability workforce partnerships, using CIBs as a case study.

Barriers that may affect our work over the next five-year period include those related to COVID-19 as well as broader ecosystem challenges. 

First, we expect COVID-19 to pose barriers over the coming year, including:

• Physical obstacles to learning. As areas around the country experience spikes in cases, in-person classes may be limited or services kept fully remote for the foreseeable future.
• Rapidly shifting job landscape. The pandemic has accelerated changes in the labor market and the future of work. Information is needed on which industries will shrink versus grow.
• Rising displacement. Continued high unemployment has accelerated basic needs, such as food security and housing assistance.
• Overwhelmed governments. While governments are best placed to fund workforce development, they are swamped with pandemic-related recovery and have limited resources.

Second, other challenges we may face over the next five years may include: 

• Uncertain regulatory environment. CIBs are based on income-share agreements. While a few states have passed laws aimed at regulation, the ISA market is largely unregulated, which could lead to products without an impact orientation entering the market and negatively affecting perception of CIBs.
• Philanthropic need. The goal is for our CIB model to be financially self-sustaining, but right now it is still an innovation. There is a lot we still don’t know; we will need philanthropic support to help us learn, improve, and scale.
• Deploying a new model. Alongside its significant potential, CIBs are a new model with a range of unknowns and significant space to learn.

We plan to overcome these barriers as follows:

• COVID-19. We will work with nimble job training providers that can shift to remote work as needed. In addition, we will use geographic-specific analyses from Burning Glass Technologies and Emsi (described above) to understand real-time gaps in the labor market and identify local providers that can equip individuals with in-demand skills. We will meet students’ needs by carefully assessing challenges they face and providing supportive services that are tailored to those obstacles. We are in active conversations with governments around our approach and its intersection with urgent labor market challenges and pandemic recovery.
• Regulatory. We are committed to supporting the creation of income-share agreement legislation that embraces student protections. We are engaged in this discussion with the aim of strengthening protections and advancing guidelines. CIBs will establish an important precedent for student-friendly practices.
• Funding. We continue to explore new funding partnerships to advance this model. While governments are stepping back from workforce funding, philanthropy and business are stepping up. We believe that by bringing funding sources together across all three sectors, we can drive change sustainably.
• Learning. We have outlined a robust learning agenda with a detailed list of questions that we seek to answer as we refine and advance our CIB portfolio. As we continue to learn, we also hope our learnings will contribute to improving workforce investments broadly. In a field of relatively little data, this opportunity would contribute significantly to building evidence around what works.

Since our founding, we have worked with over 200 partners spanning the public, private, and social sectors. For our Career Impact Bond strategy, we are partnering with various types of organizations, including:

• Training providers. We are currently partnering with General Assembly, Acuitus, Apprenti, American Diesel Training Centers, and Alchemy to offer CIBs to their students – and have a network of 200+ providers in our pipeline for future CIBs. Our aim is to work with providers that promise successful employment outcomes.
• Data companies. We are partnering with Burning Glass Technologies and Emsi to identify where jobs are growing, and with BrightHive to pull in administrative datasets for our projects.
• Peers in the space. JFF, Markle, Opportunity@Work, and Skill Up, among others, are contributing their vast knowledge and experience to help us build the CIB and its ecosystem.
• Funders. The Bank of America Charitable Foundation, Doris Duke Charitable Foundation, Ford Foundation, Google.org, Macquarie Group Foundation, Omidyar Network, Prudential Financial, and The Rockefeller Foundation, among others, have contributed support to our organization.
• Investors. We have worked with 100+ unique investors, including institutional investors, high net-worth individuals, donor-advised funds, and foundations.
• Employers. We are engaging employers to understand gaps in skills and to create seamless employment pathways for workers. For example, in Boston we are working with Partners Healthcare and Suffolk Construction. We have and continue to build similar partnerships across the country.

Social Finance is supported both by earned revenue and unrestricted philanthropic support. Our earned revenue includes fees for services and project grants from foundations and government agencies. Unrestricted support includes general operating grants from foundations and donations from individuals. We’ve worked over nine years to build a sustainable business model: Whereas until 2014 we had almost 0% earned revenue, last year our earned revenue covered 76% of our expenses. Our goal is to sustain 80-90% of our expenses through earned revenue, but philanthropy will always be necessary to support innovations – like CIBs – and our field-building activities that are critical for scale.

Our earned revenue comes from the following three areas:

• Social Investment. We design, launch, and manage PFS projects in collaboration with partners, including government, service providers and impact investors. Our projects serve stakeholders by expanding programs that work and improving lives of those in need. We often remain engaged in projects once launched to monitor and support achievement of project outcomes.
• Advisory. We partner with governments, foundations, and service providers to tackle social challenges using PFS strategies. We develop customized solutions to drive measurable results for communities. Projects include landscape analyses, feasibility studies, and outcomes rate cards.
• Market Education. We work to build the PFS field through research and publications that synthesize our learnings as a PFS practitioner. Through our market education efforts, including white papers, publications, op-eds, speaking opportunities, and media engagements, we contribute to the advancement of evidence-based policy, effective philanthropy, and impact investing.

We have significantly improved our financial sustainability since our founding in 2011. As mentioned above, then and for the next three years (through 2014) we were entirely reliant on philanthropy and had a financial sustainability ratio of near 0%. We have steadily and intentionally increased this number over time, and were able to end our last fiscal year with a financial sustainability ratio of 76%. We were successful in building toward this number as we refined our menu of services, set fees that more accurately reflected our costs, and engaged partners across sectors who saw tremendous value in our services. 

Our goal is to ultimately achieve a ratio of 80-90%, with philanthropy continuing to play a vital role in our business model. For fiscal year 2020, for example, we aim to raise at least $2 million in unrestricted philanthropic support toward our $12.1 million budget. As we test new ideas and take on persistent challenges facing our society, we will incur costs that are not covered by our earned revenue. Unrestricted funding, in particular, is critical as we build and expand participation in new products like the Career Impact Bond. Flexible funds allow us to pursue projects with the highest potential to advance human potential and pivot as necessary to make the best use of our resources.

Social Finance received notable awards over the past 12 months, including:

• a five-year grant as a winner of the Macquarie 50th Anniversary Award;
• a four-year grant and impact investment from Blue Meridian Partners; and
• grants from repeat funders, such as the Bank of America Charitable Foundation and Prudential Financial.

We also completed a first close of our investment fund in December 2019, with $22.4 million of impact investor capital raised.

By December 2025, we are seeking approximately $10 million in philanthropic capital to support our innovation, field building, and general operating expenses. We expect roughly half of this capital to directly support the growth and refinement of our Career Impact Bond strategy. The funds will allow our team to source projects and conduct due diligence, structure project terms, and manage the performance of launched projects. They will also build a supportive ecosystem that enables continuous improvement through a learning agenda, employer engagement, and student wraparound support. We will share our model and learnings with others, support student-first regulations, and work to truly redefine skilling finance at scale.

Over that same period, we are also looking to raise grants from government, philanthropy, and businesses of $50 million for our pay-it-forward funds. These funds will be pooled to cover the costs for low-income students to attend high-quality training programs through CIBs. Once students graduate, they will repay program costs into the fund, which will be used to help future cohorts of students.

Our organizational budget for fiscal year 2020 is $12,142,392. 

The Elevate Prize would be extraordinarily meaningful in helping us advance our Pay for Success work, especially the Career Impact Bond, and build awareness and replication of our approach. The Prize would shift us beyond a tipping point toward achieving our impact potential. 

First, the Prize would be valuable in helping us grow our innovative CIB strategy – a model that can make a significant difference in reviving the American Dream and preventing many people from being left behind. We would appreciate the opportunity the Prize would afford to expand our network, introduce our approach to new organizations, and push the boundaries of our work.

Second, the Prize would bring attention to our unique model – both the broader Pay for Success approach as well as CIBs specifically. By amplifying our work, we hope more people will learn about and be inspired by a new way to invest in human potential. The exposure would also raise awareness around student-friendly ISAs and could facilitate student and provider interest in participating in new projects.

Ultimately, the Prize would help us advance our work at a critical time. In the wake of COVID-19, there is a pressing need to train the workforce of the future. Innovative solutions will be essential to rapidly train people to provide pathways to economic stability, and to meet employer demand for skilled workers. With support from the Elevate Prize, we will expand CIBs to usher in an equitable recovery for vulnerable populations and elevate humanity at scale.

Partnerships are a primary lever for change to help us redesign systems to produce more equitable results. We would be interested in partnering with organizations that can help us advance our Career Impact Bond strategy, including: 

• funders focused on economic mobility, postsecondary success, and/or racial justice, either to support our work to launch new projects, build an ecosystem around the model, or contribute to our sustainable pay-it-forward funds to support students directly;
• data scientists who can help us think about labor market demand and impact, execute our learning agenda, and ensure continuous improvement;
• talent recruitment organizations that could help us align our staff and Board of Directors with our diversity, equity, and inclusion goals;
• communications firms that could help ensure our message resonates broadly and bring attention to our work by increasing our exposure; and
• legal and policy firms that could help us advance student-friendly regulations around income-share agreements.

We would appreciate support from MIT entities, such as the Media Lab as a like-minded interdisciplinary entity and others that can bring new dimensions (e.g., scientific rigor, behavioral science) to our work.

In terms of other specific potential partners, we would be happy to discuss our work and those we have engaged to date with the Elevate team to brainstorm new leads to grow our impact.