Outcomes Funds: Explained
Have a question about outcomes funds? Here you can discover the fundamentals of outcomes funds and gain a clear understanding of how they work.
Whether you're a funder, nonprofit organization, or passionate about social impact, join us as we explore the role of outcomes funds in driving innovation and measurable results for addressing societal challenges. Plus, learn how the Australian government is actively investing in outcomes funds, demonstrating its commitment to fostering social impact and innovation.
What is an outcomes fund?
An outcomes fund is a way of financing or investing that focuses on achieving specific social or environmental outcomes rather than solely financial returns. An outcomes fund is designed to pool funding to support and incentivise organisations or programs that aim to address pressing social issues. An outcomes fund takes a results-orientated approach to funding social innovations, aligning financial incentives with meaningful outcomes.
What are the key characteristics of an outcomes fund?
- Dedicated funding to pay for social outcomes,
- Intention to issue multiple separate outcomes-based contracts,
- Open to the involvement of impact investment.
These characteristics ensure a focused approach to achieving social impact, the scalability of outcomes-based contracts, and the potential for leveraging additional financial resources from impact investors.
What are the benefits of creating an outcomes fund?
Creating an outcomes fund offers several significant benefits that can drive positive impact and address societal challenges effectively. These benefits include:
- Results-oriented approach: A results focused approach to funding and investment encourages organisations and projects to prioritise delivering tangible results and impactful outcomes.
- Boosts collaboration: An outcomes fund typically brings together diverse stakeholders, such as government agencies, nonprofits, and private investors. This fosters partnerships, leveraging unique expertise and resources. This collaborative ecosystem encourages the sharing of best practices, knowledge, and networks, leading to innovative solutions and improved social outcomes.
- Promotes learning and adaptive management: An outcomes fund requires continual evaluation and strategic adjustments based on the achieved outcomes. This fosters a culture of continuous improvement and impact-driven decision-making.
- Drives efficient resource allocation: By focusing on measurable outcomes rather than traditional inputs or outputs, an outcomes fund ensures resources are allocated effectively and efficiently. This results in a maximized use of funds and a greater return on investment.
- Facilitates risk-sharing and innovation: Outcomes funds provide an opportunity for risk-sharing among stakeholders. This allows for the exploration of innovative approaches and solutions that may have higher upfront costs but greater long-term impact, as risks are shared among multiple parties. It provides flexibility to change and pivot activities by being focused on achieving outcomes.
- Encourages long-term impact and sustainability: The outcomes-focused nature of the fund promotes a long-term perspective, encouraging interventions that have lasting impact and sustainable outcomes. It encourages organizations to go beyond short-term fixes and focus on addressing the root causes of societal challenges.
- Enhances transparency and accountability: Outcomes funds promote transparency by clearly defining the desired outcomes and the corresponding metrics for measuring success. This fosters accountability among participating organizations, as they are held responsible for delivering on the specified outcomes.
What is pay-for-performance or pay for success in social impact outcomes?
Pay-for-performance or pay for success is a funding approach in the field of social impact outcomes. It involves designing contracts or agreements in which payment is tied to the achievement of predetermined and measurable outcomes. Instead of relying solely on inputs or activities, this model focuses on results and holds organizations accountable for delivering specific social outcomes.
Payments are made based on the verified success of achieving the desired outcomes, incentivizing effective performance and driving positive social change. This innovative approach encourages efficiency, effectiveness, and accountability in addressing complex social challenges.
How do you develop an outcomes fund?
Developing an outcomes fund typically involves the following four stages:
- Designating funding and establishing objectives: Public, private, or philanthropic actors allocate funding specifically for paying for social outcomes. The objectives of the outcomes fund are determined, guiding the design and operation of the fund. Key considerations include the number of outcomes contracts to be supported and the metrics used to assess social outcomes.
- Calling for proposals: Service providers, social investors, intermediaries, or partnerships are invited to submit proposals for social outcomes-contract projects. Funding is contingent on achieving specified outcomes.
- Selecting successful projects: Outcomes fund administrators review proposals and choose the outcomes-contract projects that will be implemented.
- Making payments for measurable social outcomes: Contractors receive payments if they achieve the specified social outcomes outlined in their proposals.
The outcomes fund administrator, typically a team or organization, is responsible for overseeing these stages and determining the criteria for acceptable outcomes-based contracts or projects that qualify for outcome-contingent payments.
What is the role of government in an outcomes fund?
The government plays a crucial role in an outcomes fund, driving its effectiveness and impact. Importantly, it provides strategic leadership by setting the policy framework and goals for the outcomes fund. Governments also shape the fund's objectives, prioritize key societal challenges, and align the fund's activities with broader national or regional development priorities.
It also contributes funding to the outcomes fund, acting as an outcomes payer and providing the capital for achieved social outcomes. This investment allows the government to support effective and innovative solutions and partnerships, leveraging its financial capacity. Additionally, the government's funding attracts additional support from philanthropic organisations and impact investors, enhancing the fund's impact and scalability.
Why has the Australian Government established an Outcomes Fund?
In the 2023-24 Budget, the Australian Government committed $100million towards . This will see the Commonwealth partner with states, territories and social enterprises to tackle by funding projects that deliver outcomes in communities. As is standard in outcomes funding, contractual payments will be made when a program achieves agreed, measurable outcomes.
The Federal Government’s establishment of an Outcomes Fund reflects its dedication to fostering collaboration and innovation in addressing societal issues and creating lasting impact in communities across Australia.
What’s the link between an impact bond and an outcomes fund?
An impact bond and an outcomes fund are closely linked and share a common goal of driving social impact and achieving measurable outcomes. An impact bond is a financing mechanism within the broader framework of outcomes funds. It involves private investors providing upfront capital for social programs, while the outcomes fund is the overarching funding structure that manages multiple impact bonds or outcomes-based contracts.
The outcomes fund sets objectives, metrics, and allocates funding, ensuring transparency and effective resource allocation. It serves as the financial infrastructure for impact bonds to thrive and deliver social impact.
Want to learn more?
- How to engage with outcomes funds
- Best practices for designing outcomes funds
- How funds globally are being evaluated
- How you and your social impact organisation can participate and benefit