March 23, 2023

Outcomes-based financing: What do nonprofits need to know?

Pointers for nonprofits that want to capitalise on development impact bonds and other emerging financial instruments.

6 min read
This is the second article in a 6-part series supported by the British Asian Trust. This series highlights the role that social finance can play in driving long term and sustainable change in the country.

View the entire series here.

India has been pioneering the use of outcomes-based financing (OBF) among low- and middle-income countries and has seen a surge of funding directed to OBF instruments in recent years.

OBF instruments tie the disbursement of funding for development projects to the achievement of results. These results are linked to the stated development objective—outcomes—as opposed to actions, inputs, activities, and outputs. Some types of OBF instruments include development impact bonds (DIB), impact guarantees, result-based financing contracts, and social success notes (SSNs).

Since the launch of the first DIB by Educate Girls in 2015, India has seen four more DIBs in education, health, and skills development—Quality Education India DIB, Haryana Early Literacy DIB, Utkrisht DIB, and Skill Impact Bond. Two SSNs—one for affordable private schools by Varthana and Michael & Susan Dell Foundation and one by IPE Global for healthcare enterprises—are also in the works. These OBF projects collectively mobilise at least USD 30 million of funding and impact approximately 6,00,000 people. Many more OBF projects are also in the offing.

While there is a definite growth in OBF instruments and projects, such opportunities are not available to all, with only a small pool of nonprofits being able to participate as partners on these projects. There are multiple reasons for this:  

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  • Lack of access to networks and information that enable nonprofits to tap into such opportunities due to the nascent stage of the OBF sector and limited players. 
  • Lack of awareness and know-how about how these projects work and what funders expect from nonprofits.
  • Limited internal capability to participate in such projects.

This article focuses on sharing the experiences of the British Asian Trust (BAT) and our learnings on navigating these barriers. BAT has undertaken multiple OBF projects in the past five years and is working on building the capacities of nonprofits through the Outcomes Readiness Programme, a collaborative initiative with Atma.

What do OBF projects mean for nonprofits?

There is a common misunderstanding that OBF projects entail nonprofits getting paid only after the achievement of outcomes and not receiving adequate support for upfront working capital. On the contrary, the theory and practice of OBF essentially focuses on de-risking nonprofits by bringing in a class of risk investors who provide upfront working capital to nonprofits. These investors are the ones who get paid only if pre-agreed outcomes are met, thereby moving the risk away from the nonprofits.

By facilitating upfront funding, most OBF instruments and projects remove shorter funding cycles and uncertainty, allowing nonprofits to focus their energies on implementing, innovating, adapting, and strengthening their interventions rather than on completing quarterly activities to get the next tranche of funding or finding the next donor.

At the heart of the OBF theory lies the fundamental belief that nonprofits are generally experts in their domain and know their solutions and implementation. As such, OBF instruments try to shift the power dynamics inherent in a grantor–grantee relationship towards a more equity-based partner relationship where funders contribute financial resources but do not micromanage or tell nonprofits what to do. Instead, they trust the nonprofits to bring non-financial resources such as their expertise and understanding of the community and ground realities to the project.

Having said that, most OBF tools do require specific mindsets, competencies, and capabilities from nonprofits, which are highlighted in the next section.

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two girls in school uniforms riding their  bicycles on a road--outcome-based financing
There is a common misunderstanding that OBF projects entail nonprofits getting paid only after the achievement of outcomes. | Picture courtesy: Prasanta Sahoo / CC BY

What do nonprofits need to participate in OBF projects?

1. Adoption of an ‘outcomes-first’ approach

There are two different levels at which the outcomes-first approach reflects in a nonprofit.

Organisational level: The nonprofit needs to gradually start aligning its overall strategy to the outcomes it wants to achieve over the medium and long run. This strategy plays a key role in guiding the priorities of different departments such as fundraising, programme management, monitoring and evaluation, and communications.

OBF structures require high engagement and buy-in from the nonprofit’s leadership.

For instance, Sesame Workshop India, one of the nonprofits under our Outcomes Readiness initiative, refined its strategy to align with its impact objectives. Sonali Khan, managing director of Sesame Workshop India, shared, “The exercise allowed us to develop a cohesive long-term strategy and plan that spoke to the needs of our internal as well as external ecosystems. It helped articulate our definition of impact, streamline our programmatic focus areas, prioritise important fundraising channels and influence strategy across our global offices.” 

Project level: OBF structures require high engagement and buy-in from the nonprofit’s leadership to design a clear project road map that aligns with the mission of the organisation. This road map provides clarity to the project and field team members, thereby allowing them to build work plans that are geared towards achieving the set outcomes within a specific timeline.

For instance, one of our partners on the Quality Education India DIB, Kaivalya Education Foundation, highlighted that the outcomes focus of the DIB meant that each Gandhi Fellow knew what was expected and what had to be achieved. This led to a sense of purpose, clarity, and uniformity of goals throughout the organisation. The chairman of the organisation himself became very involved in having a target-based learning outlook, which then percolated down to all levels of the organisation.

2. Ability to identify and manage risks that arise during implementation

Under OBF structures, outcome payments to investors are linked to the performance of the nonprofits and programme results. As such, any risks (internal or external) that affect programme implementation and outcomes need to be clearly identified, monitored, and managed effectively. This in turn means that nonprofits must be well versed in applying risk management tools such as root cause analysis, creating and using risk registers, and undertaking scenario planning in their projects. Good risk management also requires nimble and agile decision-making, and high engagement between programme and field teams to identify risks, develop and implement mitigation strategies, and quickly revise strategies if needed.

For instance, under our Bharat EdTech Initiative, funded by a performance-linked grant, our community partners identified the low activation and poor engagement with EdTech apps as a key risk to achieving the learning outcomes envisaged. They had to quickly design and pilot many targeted micro-strategies to increase the time spent on apps.

3. Openness and willingness to subject one’s intervention to third-party evaluation

Third-party assessments are often perceived as report cards that label interventions as successes or failures and are therefore met with resistance at times. However, third-party evaluations are the cornerstone of the OBF structure—they trigger payments for investors, assess an intervention’s performance, and generate valuable insights that can help in improving performance.

A mindset shift is needed to transform the fear of third-party evaluations into a learning experience. Participating in such rigorous impact evaluations necessitates a strong theory of change, sharply defined outcomes, and a corresponding monitoring and evaluation framework to measure these. Sometimes, it also means that a nonprofit should possess adequate confidence, domain knowledge, and experience to understand the technicalities of an evaluation framework, and challenge the framework if it is not suitable.

4. Strong data-driven performance management culture in a high-stakes environment

Nonprofits need to have robust systems and processes to gather, analyse, and use performance-related data to guide their interventions. They should be prepared for and comfortable with collecting and synthesising fit-for-purpose data and using it to make necessary pivots in their interventions to meet their on-ground needs. For instance, Gyan Shala said that the DIB structure enabled them to improve processes such as collecting regular feedback from field teams to pass on to the curriculum design team.

Under OBF instruments achieving outcomes is central to payments, so performance monitoring is a must and not merely nice to have.

Similarly, under the Bharat EdTech Initiative, we had to provide our community partners with a tech-based solution to capture data on the various types of nudges that encourage the use of EdTech accurately and regularly. The performance manager for this project provided training and handholding to people at all levels of the organisation, especially the field staff, to ensure that they understood the importance of this data and how it was used, and did not see it as an administrative burden.

Sonali Saini, founder and CEO of Sol’s ARC, another participant under Outcomes Readiness, highlighted, “Identifying a specific set of key success indicators from a long list, setting up dashboards that consolidated data in line with these indicators, and using this data for quick decision-making were some of the most valuable capabilities that we built under this initiative.” Under OBF instruments achieving outcomes is central to payments, so performance monitoring is a must and not merely nice to have. This can involve working under high pressure.

Participating in OBF instruments and projects requires a convergence of mission, mindset shift, and capabilities. While this may sound ambitious—and it certainly requires sustained buy-in and commitment at all levels of an organisation—nonprofits do not have to walk the path alone. Sneha Arora, CEO of Atma, believes that building outcome readiness is about enabling nonprofits to develop the confidence, systems, and processes they need to raise and use results-based funding.

While donors are shifting towards outcomes, it does not always translate into OBF projects or tools. Therefore, there are limited opportunities for nonprofits to raise funds or apply their learnings. There is a need and opportunity for traditional grants—which is the primary source of funding for nonprofits—to take on a more pronounced outcome orientation. Within such programmes, donors can provide specific capacity-building support to nonprofits and invest in performance managers who can hand-hold the nonprofits. Similarly, to plug the information asymmetry, intermediaries can share their learnings, resources, and templates with the wider nonprofit sector and create platforms (such as India Blended Finance Collective or Convergence) to showcase relevant opportunities. 

This article was updated on April 13, 2023. An earlier version incorrectly stated that two SSNs–one by Varthana and Michael & Susan Dell Foundation, and one by IPE Global for healthcare enterprises–collectively mobilised USD 30 million of funding and impacted approximately 6,00,000 people.

Know more

  • Read this interview to learn what it would take to build the social finance ecosystem in India.
  • Read this article to learn about the role implementing organisations can play in improving nonprofits’ outcome readiness.
  • Read this report on the state of blended finance in 2022.

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Rhea Miranda-Image
Rhea Miranda

Rhea Miranda is a social finance analyst at the British Asian Trust, where she works on projects focused on driving Sustainable Development Goals in India. She led the Outcomes Readiness Programme for education nonprofits and is currently part of the transaction management team for the Back-to-School Outcomes Fund in India, a multi-state project aimed at driving improvements in foundational literacy and numeracy. Rhea has five years of experience across areas such education, gender empowerment, strategy consulting, corporate social responsibility, and innovative financing.

Anushree Parekh-Image
Anushree Parekh

Anushree Parekh leads British Asian Trust's social finance work in India. She is a social impact consultant and has more than 15 years of experience in corporate social responsibility, public policy, and nonprofit sectors in India and the UK. Before joining BAT, Anushree led impact advisory at Waterfield Advisors and set up the research and strategy practice at Samhita Social Ventures. She has an MSc in Development Studies from SOAS, University of London and a BA in Economics from St. Xavier's College, Mumbai.