Updated: Jun 17
If we are to improve lives on a global scale and solve the world’s most pressing problems, we must use philanthropy and implement large pay-for-success models to catalyze systemic change.
Enter Outcome Funds.
These funds are professionally managed vehicles that sign outcome-based contracts with social delivery organizations. Their goal is to scale outcome-based contracts and drastically reduce the time and cost it takes to put them in place. Once a contract between a delivery organization and an outcome fund has been signed, the delivery organization can raise the investment capital it needs to fulfill the contract. Investors – whether independent ones or those working for development aid organizations or philanthropic foundations – can provide this capital through DIB funds.
You can view DIB funds and outcome funds as the two electrodes of a battery, powering the funding of delivery organizations. DIB funds pay the upfront money, while outcome funds pay when the outcomes have been achieved.
This innovative approach is illustrated in the diagram below.
The dynamic between SIB/DIB funds and outcomes funds is established through the following steps: 1. Outcome funders commit $1 billion to the outcome fund, which signs outcome contracts with delivery organizations.
2. This catalyzes up to $700 million from investors who finance the social delivery organizations, through DIB funds, to deliver their interventions.
3. NGOs and purpose-driven businesses deliver the education interventions to improve learning outcomes.
4. Students experience increased educational attainment, which is independently verified.
5. Achievement of the contracted outcomes triggers payments from the Outcome Fund to repay investors the original investment with a return that increases with the degree of success.
For example, the Education Outcomes Fund for Africa and the Middle East (EOF) aims to raise $1 billion to improve the educational attainment of ten million children. EOF is a joint initiative between the Global Steering Group for Impact Investment (GSG) and the Education Commission. It is supported by an international group of foundations looking for innovative ways to maximize improvement in education in Africa and the Middle East, including the Aliko Dangote Foundation, Ford, Omidyar, The Big Win, ELMA, UBS Optimus, Hewlett and DFID.
Led by Dr. Amel Karboul, a former Tunisian government minister, the EOF helps catalyze investment in effective education delivery organizations, such as Camfed and iMlango. Camfed is an NGO that has supported the education of over 500,000 girls in the most deprived communities of Zimbabwe, Tanzania, Ghana, Zambia and Malawi. Similarly, iMlango is an NGO that establishes schools in rural areas of Kenya with an individualized e-learning platform, computer tablets and broadband access.
As with the Educate Girls project discussed in my previous blog, the outcome fund model is being used to help scale education efforts. The British Asian Trust’s outcome fund has raised $11 million to expand the project throughout Rajasthan, Gujarat and Delhi, which will help 200,000 children.
One of the most promising efforts is being led by the government of Liberia. The Liberian Educational Advancement Program (LEAP) represents an early step towards introducing the approach of an outcome fund to social service delivery in the country. It aims to improve educational attainment in the country’s schools – as of 2015, 25 percent of 15–24-year-olds were illiterate, and 52 percent of primary-school-age children were not enrolled in school. While LEAP currently operates as a public–private partnership, the goal is for LEAP to become an outcome-based program, in which the achievement of targeted outcomes will dictate payments made to LEAP by outcome funders.
Large outcome funds will make it easier to get bigger SIBs and DIBs off the ground and reduce the time and cost it takes to launch them. By multiplying and extending interventions, large outcome funds will bring systemic change in education, healthcare, employment and the environment.
In a world with its share of significant problems, scaling up solutions is imperative. We must make a systemic change if we really want to tackle social and environmental issues. As money flows into multi-billion-dollar outcome funds and they attract large SIB and DIB funds to invest opposite them, impact entrepreneurs leading delivery organizations will raise the funding they need to implement their innovative approaches at scale. Doing so will bring systemic change– just as venture capital and tech entrepreneurs brought systemic change through the Tech Revolution.
I believe that outcome funds will catalyze breakthroughs that will enable the world’s best NGOs and social entrepreneurs to raise more money, scale their operations and help more people. The scale of our problems requires powerful new mechanisms.
Join me next time when we take a deep dive into endowments and how impact investment offers innovative foundations a way to achieve greater impact. Until then, read IMPACT: Reshaping Capitalism to Drive Real Change. Join the Impact Revolution and make your mark on the world.