BACKGROUND: Mental illness can be both a cause of and a reaction to being homeless. When homelessness co-exists with mental illness, the provision of care for very vulnerable people is significantly complicated. Our initiative built on a model of assertive outreach and embedded mental health staff into the daily operations of Hanover Welfare Services and Sacred Heart Mission welfare services in inner Melbourne. The initiative's aim was to facilitate closer collaboration between mental health and welfare services and develop staff capacity to better identify and support people living homeless with a mental illness. METHOD: The project involved studying the impact of our assertive outreach model on consumer and service outcomes. Demographic, clinical and service usage details for consumers engaged by the initiative were recorded. Changes to the rate of admission of people from both welfare services to The Alfred Inpatient Psychiatry Unit and requests for support from The Alfred Crisis Assessment and Treatment Service were also recorded. RESULTS: People engaged by this initiative had high levels of previous emergency medical or psychiatric service usage, but relatively low levels of current community mental health engagement. There were also high levels (almost 52%) of comorbid substance misuse. The initiative was, however, able to engage more people in ongoing community mental health care, which particularly when provided in collaboration between mental health and welfare staff, achieved improvements in accommodation stability. The initiative also resulted in improved identification and prevention of mental illness crises through supporting a more rapid onsite mental health response. CONCLUSIONS: Embedding mental health staff into the daily operations of two welfare services in inner Melbourne improved inter-service collaboration and the identification and care for people living homeless with a mental illness.