Tias Dutta, Geeta Tiwari | Published: 23 October, 2024

Outcome-based Financing (OBF) is a promising funding model for Nonprofits. It promotes transparency, accountability, and a focus on long-term outcomes. CIFSI’s latest report Navigating Outcomes- Based Financing in India: Perceptions of the Not-for-Profits Outcome-Based Financing (OBF), finds out the gaining popularity of OBF for funding, with organisations appreciating OBF benefits for NPOs more than its associated risks and market challenges.

71 NPOs across India in diverse sectors were surveyed to understand how they view OBF as a funding tool. They were presented with a mix of typical risks, benefits and challenges in Outcome-Based financing, and their responses were measured on a Likert scale to arrive at actionable trends.

A Positive Outlook on OBF

An impressive 83% of nonprofits are enthusiastic about OBF's potential, viewing it as a promising alternative nonprofit funding model to traditional funding. According to the data, nonprofits rate the benefits of OBF at an average of 3.6, compared to a lower rating of 2.6 for potential risks and 3.0 for market-level challenges in Outcome-Based Financing.

Enhancing Accountability and Transparency

Nonprofits appreciate OBF as a tool to diversify non-profit funding strategies and as a mechanism to strengthen their operational practices for driving accountability, evidence-based decision-making, and transparency. Benefits such as "showcasing validated evidence," "better measurement of outcomes," and "stronger data systems for tracking impact" were rated high. Interestingly, “lack of trust in third-party/external evaluation", often perceived as a risk, has been rated low, highlighting nonprofits' openness to external assessments and commitment to accountability.

The Challenge of Flexibility

While OBF for funding theoretically offers greater flexibility in fund usage and project implementation than traditional funding models, this benefit appears less important to nonprofits. “Flexibility in fund usage" and "innovation and flexibility in service delivery" received lower ratings as benefits. This suggests that while non-profits recognise the theoretical advantages of OBF, other benefits, such as accountability and transparency, currently hold more relevance.

Financial Concerns Remain

Despite the advantages, financial concerns are common among NPOs of various sizes. They commonly perceive risks such as "inadequate working capital" and the "risk of funding being stopped halfway if outcomes are not achieved" as significant challenges in Outcome Based Financing. OBF models like Development Impact Bonds (DIBs) are designed to address these risks by involving risk investors who provide initial capital with reimbursement based on achieved outcomes. This highlights the need for increased awareness and education about how OBF instruments can mitigate financial risks.

The Need for Impact Standardisation

Another key challenge identified is the lack of impact standardisation. This contrasts with our previous observations where nonprofits hesitated about standardising impact due to sector complexities. This change in perception over time underscores the importance of engaging all stakeholders, particularly nonprofits, to understand their perspectives on impact standardisation and develop effective frameworks and metrics. Most nonprofits face challenges in measuring their impact effectively, which reduces their confidence in OBF for funding. As a result, defining outcomes becomes particularly challenging when projects are in their early stages. A shared understanding of impact indicators and baseline metrics is needed to address this, alongside increased collaboration to establish standardised frameworks.

Moving Forward

The positive reception of OBF among nonprofits underscores its potential to transform funding practices and enhance non-profit funding strategies and practices. By addressing financial concerns, improving awareness on OBF instruments, and exploring solutions for impact standardisation, the sector can better leverage OBF to drive positive social outcomes. As NPOs continue to navigate these challenges, the insights gained from recent studies will be crucial in shaping the future of OBF and its role in the nonprofit landscape.