How are outcomes funds evolving over time?

Outcomes funds- what’s in a name?

New research from the Government Outcomes Lab identifies 17 outcomes funds across nine countries. Eight of these funds are based in the UK- a clear majority. But what are outcomes funds and how are they different to impact bonds?

Impact bonds are individual projects involving cross-sector partnerships and upfront social investment, focused on paying for pre-agreed social outcomes. On the other hand, outcomes funds encompass multiple impact bonds. The Government Outcomes Lab recognises that while there is no single definition, outcomes funds can be characterised in three main ways:

-       Dedicated funding to pay for social outcomes

-       Open to involvement of impact investment

-       Intention to issue multiple separate outcomes contracts

Outcomes funds leverage these characteristics to unlock scale and cost effectiveness for impact bonds. While pursuing these larger objectives, outcomes funds are also evolving over time. This evolution is transpiring in three main ways.

1. Shifting away from rate cards towards greater flexibility

Outcomes funds often set the desired outcome metrics and associated outcome prices upfront in ‘rate cards.’ Earlier outcomes funds in the UK, such as the Innovation Fund and Youth Engagement Fund, used this approach to define a menu of outcomes metrics around education and employment (e.g., “improved school attendance” and “entry to first employment (13 weeks)”. These rate cards also listed the evidence required to verify each outcome metric, and the maximum payment that could be made by commissioners for each outcome achieved. Projects could then choose particular metrics to focus on. 

However, recently launched funds in the UK have moved away from this approach. Funds such as the Commissioning Better Outcomes Fund and Life Chances Fund (LCF) encouraged projects to define their own outcome metrics and outcomes prices in consultation with their stakeholders. This offers projects greater freedom and flexibility to focus on impact that is most relevant for them. A wide range of policy areas could therefore be targeted within the LCF, from education and health to social care and homelessness. Projects could rely on just a couple of outcomes metrics, or as many as 19. However, arriving at these metrics was not always a straightforward task. It was frequently underpinned by extensive financial modelling and ultimately approved as part of the funds’ multi-stage application processes. 

2. Encouraging collaboration between local and national government 

In the UK, initial outcomes funds featured central government departments as the sole outcome funders for social impact bonds. For example, the UK Department for Work and Pensions (DWP) served as the only outcome funder for most projects in the Innovation Fund. This wasn’t the case for long as other central government departments soon began to act as co-commissioners. Local authorities, including city and county councils, also began to act as outcome payers.

This collaborative and joint commissioning approach is now a norm in UK outcomes funds rather than an exception. The Life Chances Fund (LCF) required each project to be backed by local government, who would act as the main outcome funder. Any ‘top up’ funding awarded from central government was conceived as minority funding. 18 of the 30 LCF projects eventually signed off were led by local authorities, who were seen to have championed the idea and convened relevant stakeholders around it. Central government is no longer the sole driver of demand, with local government taking a leading role in the development of social impact bonds.

3. Supporting systemic change and development 

Not unlike impact bonds, outcomes funds are increasingly being seen as tools for supporting systemic change. The goal in these cases is not to simply support more impact bonds to launch. Instead, some stakeholders see outcomes funds as new ways of working which can be embedded to produce long-term change. This can include focusing on outcomes rather than inputs or activities, employing blended finance, implementing procurement differently, or bringing new partners onboard with diverse skills and experiences. Milena Castellnou, Principal at The Education Outcomes Fund, adds, “The marginal cost of contracting an additional provider is quite minimal compared to the cost of setting up the programme.” Larger scale can therefore be complemented by lower transaction costs.

In the world of international development, outcomes funds can help donors channel ODA (official development assistance) towards capacity building and policy innovation. This would complement the current shift from pure development spending towards strengthening policy objectives. Claire Devries, First Secretary for Development at the Canadian Embassy to Colombia, described outcomes funds as a way to “do development differently” and a means to foster a culture of innovation. 

Capitalising on outcomes funds to influence policymaking- the way forward

Outcomes funds are a key part of the innovation architecture. Innovation ecosystems can often exist in a silo, and find themselves detached from policymaking. Governments can use outcomes funds to specify innovation needs and direct the work that’s being done in innovation ecosystems towards serving those needs. As Avinsh Gungadardoss (Managing Partner and Co-founder, Instiglio) puts it, “Outcomes funds can structure an open source for innovating public service delivery.” By bridging these spheres, outcomes funds can strengthen cross sector partnerships.