The exchange offering a new way to do payment by results

Originally published in DevEx

One of the problems in development is that donors often struggle to find the organizations that are doing the most to improve people's lives, in the most cost-effective way possible. Meanwhile, those organizations often struggle to navigate a complex, time-consuming bureaucracy to get their hands on much-needed money.

But a new initiative plans to set up a marketplace that will connect donors and development organizations in a cheaper, less complex, and more efficient way.

OutcomesX, short for Outcomes Exchange — which was set up with grants from funders including the Bill & Melinda Gates Foundation and Google.org — recently launched a $2 million pilot project. Development organizations can use the exchange to publish details of their work along with evidence of its effectiveness, similar to the way financial products such as bonds or shares are listed on an exchange.

Then funders can back the ones delivering the results they want to see.

Phyllis Costanza, OutcomesX co-founder and former CEO of the UBS Optimus Foundation, a major grant giver and one of the pioneers of development impact bonds, said the exchange was set up to address a fundamental issue with development funding: When donors want to solve a social problem, they often have no way of connecting with the organization that has the best answers.

“Social impact is a huge market, but it's the most inefficient market,” Costanza said. “If you try to look at what we spend versus what we've achieved, there's absolutely no correlation.”

So how will OutcomesX work? And can donors be persuaded to ditch their request for proposals and funds via the exchange instead? Or will they continue to prefer the control afforded by their own platforms?

What is OutcomesX?

The scale of the problem

Costanza points to several problems with traditional methods of funding.

First, funders find it hard to connect to the organizations with the best solutions. A request for proposals, for example, prioritizes well-networked organizations with access to the funders that can figure out which opportunities are coming up. The process disadvantages smaller organizations close to the ground.

“There's not good enough data to link up efficiently the buyers and sellers of social impact,” she said. “So we are building this marketplace to create greater efficiency and greater equity in the space.”

She also said there is a high cost to applying for a grant — $20 for every $100 raised.

Unsuccessful applicants waste their money, and even successful applicants spend a lot reporting on their progress. Again, this favors big organizations with specialist bid writers and compliance managers.

It’s also not easy to measure if a grant worked. Many experts feel that impact data is hard to collect and assess, and nonprofits are incentivized to exaggerate their impact.

An attempt to solve this has been the payment-by-results contract, where funders pay for social outcomes only once they are achieved. But this approach still has many of the same problems: Donors aren’t able to relinquish control and continue telling nonprofits what to do; results are difficult to measure with enough accuracy; there are incentives to game the system; and paying in arrears for results creates cash flow problems that hamper small- and medium-sized NGOs.

Two more specialized — and closely related — types of payment-by-results contracts are the social impact bond and the development impact bond. These see philanthropists or investors carry the burden of funding the project, place evaluation in the hands of independent specialists, and involve experts in the field doing proactive research to select the organizations with the best interventions.

Impact bonds have produced some good results, and experts say they have removed some of the perverse incentives of other results-based finance models and have created complex data systems that allow organizations to rapidly make improvements to their work.

But impact bonds are too complex and expensive to deliver at scale, and they have become seen as tools mainly for trying out new ideas.

OutcomesX is intended to take many of the principles that have worked in impact bonds and deliver them more cheaply and at a larger scale.

“It operates like an outcomes-based financing mechanism, but without the complexity,” Costanza said.

Evidence, price, and market

Costanza’s co-founder at OutcomesX is Jason Saul, an expert on measuring social impact. He said three things are needed to fund efficiently: You need to know what services are being provided; you need to know what they should cost; and you need a marketplace in which many funders and providers are able to interact.

He gave the example of a simple outcome: Getting your dishwasher fixed. Here, the process is standardized. You can go onto a home repair website, see prices, see providers, and check their results.

“But no one ever standardized social outcomes in a way that made sense for the sector,” he said. “And that’s because it’s really freakin’ hard. We did it, but it took a really long time.”

Before starting OutcomesX, Saul created the Impact Genome Registry, where researchers collected data on 77,000 outcomes from 11,000 grants, and identified 132 common social outcomes, such as access to affordable housing or to nutritious food.

The registry now has data on more than 2.2 million social projects and organizations, which let them work out the typical price of a social outcome.

OutcomesX is an attempt to deliver the third part of the puzzle — a marketplace where donors and implementers can find each other.

OutcomesX will use the registry data to gauge the effectiveness of projects listed on the exchange. Anyone wanting to be on the exchange will have to upload evidence of impact, details about their program, and cost information for the Impact Genome researchers to review and verify. Only data that reaches a quality threshold will be listed.

The OutcomesX founders are confident this level of monitoring will be sufficient to satisfy funders used to conducting their own due diligence.

Pilot project

OutcomesX aims to showcase its marketplace through a pilot project — funded by the UBS Optimus Foundation — that will focus on mental health and education among children in Ukraine. It worked with local experts to recruit 63 Ukrainian nonprofits to gather impact data and upload that to the Impact Genome Registry. Researchers evaluated the evidence and identified 25 projects to work with.

Likewise, as other organizations deliver their outcomes, they will upload their evidence to the registry, whose researchers will assess the quality of that evidence. Unlike a standard grant, the registry sets no preconditions on the format in which evidence is submitted, Costanza said. The organizations will gather evidence in whatever way makes sense to them, meaning the cost of data collection is much lower.

Cash in advance?

When should donors pay for a social outcome? Before or after it’s achieved?

With grants, donors are effectively trusting organizations to deliver, although they have limited evidence that they will. With payment-by-results, they like what the organization aims to do, but don’t want to pay until after they’ve seen the results.

The problem with that is that organizations don’t get money upfront, causing cash flow problems. And what happens if the project doesn’t work? That’s a big risk, so donors charge a lot more as a risk premium.

Neither of these arrangements is very good. So OutcomesX is effectively saying, why don’t you prove that you’ve already done good things, and we pay you for that? Then, next year, come back with more evidence, and we’ll pay you again.

In the beginning, though, that may not happen. Funders may still want to pay in arrears — perhaps because they’re funding a new service that hasn’t been running long enough to yield a year of results, as with the pilot project. Because implementers will have a gap between delivering services and getting paid, UBS Optimus Foundation will provide some cash upfront. In future projects, if outcomes are being paid for in arrears, OutcomesX plans to broker low-interest loans to cover costs.

Ideally, though, Saul and Costanza hope that in the long term, most funders using the exchange will pay for outcomes that have already been achieved, giving organizations unrestricted cash to deliver a new set of outcomes. OutcomesX itself will be funded by taking a percentage of each transaction, as well as fees for being listed on the exchange.

Saul said he hopes the exchange will work in the same way a marketplace for carbon credits does, where firms are paid for a social outcome they have already produced.

“Now you create a market where you aren't paying for results,” he said. “You're paying for retroactive credits that were already produced and verified. I think that’s a very marvelous innovation that has already been market-tested by the carbon markets.”

Barriers to success

Avnish Gungadurdoss, a co-founder of Instiglio, a social enterprise working on results-based finance, said he was impressed by the work that had taken place on OutcomesX, but he cautioned whether the largest donors could be persuaded to use it.

“An exchange entirely rests on critical mass,” he said. “The whole value an exchange generates is having many people on both sides of the equation.”

“And the question really is, are donors going to join that exchange? And will it sustain that excitement over time because if donors are not there, then people are quickly going to lose interest?”

In the past, he said, it had proved difficult to persuade large philanthropic funders, and institutional donors such as USAID, to sign up for joint projects.

“We’ve tried some version of this before with outcomes funds, which are basically pilot versions of an exchange,” he said. “And for us and most other players, the ambition of attracting hundreds of millions of dollars has largely not played out.”

He said funders all had their own checklists for who they wanted to fund, and their own due diligence processes, and any system had to tick all the donors’ boxes before they would get involved.

“If you take USAID, they find it very challenging for so many reasons — political, administrative, lobbying reasons — to contract the innovative and small organizations that might tend to report to this exchange, and they're going to use the same 10 or 20 big aid contractors.”

To change this, he said, funders need to be pushed — and helped — to reform. This is something Instiglio is increasingly focused on.

Right now, institutional funders are judged not on effectiveness and outcomes, but on compliance with fiduciary duties, and getting money out of the door.

“If we want OutcomesX to succeed … we need to gravitate to these deeper entrenched issues and find ways to solve and tackle them,” he said.

Saul acknowledged that the biggest problem will be getting enough organizations to use the exchange.

“A market without liquidity, as they call it — which is a fancy word for having a bunch of buyers — isn’t a market,” he said.

Saul said he anticipated not all funders would be keen, but that enough would see the benefits of an open exchange that it would start to work.

“I'm fully cognizant that that is a major challenge,” he said. “I believe there's 20% of people who [see this is a better way of doing things] because they're coming to me right now.”

“I think we have a task ahead of us. But this is the fight I want to fight.”

He said trillions of dollars a year were being spent on generating social impact.

“We do not have a resource problem. We have a resource allocation problem. And we want to fix that.”