Philanthropy’s “Toyota Moment”: Embracing Results-Based Funding to Increase Aid Effectiveness
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In 1943, a young technical school graduate named Taiichi Ohno got a job as a shop-floor supervisor at a small Japanese company called Toyoda Spinning, but he had visionary ideas and was destined for much more. Ohno moved up the ranks, eventually leading the design of a new management system for Toyota Motor Company, as it was now called. The system launched Toyota on a path to become one of the top automotive manufacturers in the world. Central to Ohno’s philosophy, which he outlined in his books, is removing muda, or waste. One of his 10 precepts is “Waste is hidden. Do not hide it. Make problems visible.”
As the founder of the Delta Fund and the chief of impact and innovative financing at Village Enterprise, a nonprofit dedicated to ending poverty in rural Africa, we feel it’s critical to make problems in the philanthropic sector visible and to innovate in the sector by creating better, more efficient ways of using funds to solve the world’s problems. And our experience — and a growing body of evidence — tell us that a change in how programs are funded will vastly improve efficiency and outcomes in our work. In other words, it’s time for our Toyota moment.
The old, inefficient way: Paying for activities
In philanthropy, we have been living with inefficient aid markets for decades, stemming from difficulties in defining, measuring and paying for impact.
Imagine paying someone to stock grocery shelves without any assurance anyone is buying food. Then imagine asking that grocery store to write detailed, regular reports about every item they placed on the shelf. This probably sounds comical, but this is the way aid funding historically works, and too often still does.
For much of the 20th century and through to today, “activities” have been the currency on which aid has been measured. Define your program, commit to some activities, and funders pay for those activities.
The activities may include anything from holding financial literacy sessions to giving out vouchers for fertilizer. For a long time, whether any of these activities led to quantifiable improvements in people’s lives was a mystery.
But this has now changed.
Good data, new tools
Over the last two decades or so, extensive research has been conducted on what works to improve the lives of the most vulnerable. The pioneers of this approach were development economists Abhijit Banerjee, Esther Duflo and Michael Kremer, who were awarded a 2019 Nobel Prize “for their experimental approach to ending poverty.” Hundreds of researchers have followed in their footsteps, yielding insights on the effectiveness of programs like unconditional cash transfers and multifaceted graduation-out-of-poverty approaches. This research has also revealed that, despite having the right intentions, many programs that aim to do good are actually ineffective.
In one illustrative graph, Charity Navigator shares how much approaches to improve health vary in their effectiveness:
In other words, we’ve fixed that historical problem of not being able to know if people are fed. In fact, we can now learn if they are more empowered, how their children fare and even how their neighbors fare. We also have better and cheaper tools to collect and analyze data than ever before.
By now, we also broadly recognize that the pay-for-activities model falls short of both ensuring the outcomes that we want and creating systems that foster improvement and are capable of improvement themselves. We also know this model incentivizes organizations to complete activities and fulfill their financial compliance and reporting duties, even when they know that the activities are not working.
A better path: Pay for results
We have started to make progress, albeit not in the mainstream. The past five years have seen some positive advances in how giving is deployed — the beginnings of our transformation to a better path. Of particular note are gains from both the rise of major philanthropic collaborations and trust-based (unrestricted) giving. These early shifts show promise, but challenges, as well.
By pooling human and financial resources, the rise of major philanthropic collaborations has helped address several problems: small and fragmented giving, limited capabilities and partnerships for driving systems change, and the resource-intensive nature of vetting high-potential investments (see here and here). However, concentrating capital through donor collaboratives can also magnify implicit biases and donor-grantee power imbalances (see here).
Trust-based giving helps address imbalances between donors and grantees. A recent study of MacKenzie Scott’s early giving found that it had positive effects on both the recipient organizations and on their leaders (see here). However, Scott’s large, unrestricted grants are an industry exception. And even the organizations that have received these grants still need to consider how they will compete for limited development resources in the future.
Results-based funding (RBF) represents a newer yet growing path for funding philanthropy and aligning incentives across stakeholders. While RBF includes a range of financing mechanisms, the overarching concept is simple: Financing is tied to the delivery of pre-agreed-upon and verified results. The impact bond is one widely studied mechanism for deploying RBF. Since the launch of the first impact bond in Peterborough, England, in 2010, a growing body of evidence demonstrates that tying payment to results works — across many types of projects. Pioneering projects across sectors in the development space, such as education, poverty, health, humanitarian response and conservation, are proving that it is both possible and desirable to pay for results.
So how does it work?
New rule: Incentivize improvement
Currently, in the aid sector, actively identifying, owning and fixing problems related to the ultimate social value of the services delivered is the exception, not the rule. Most managers or service providers would not slow down or shut down a project if they can get the corresponding “activities” implemented, even if they know those activities hold no value. This is where results-based funding is different, and where Ohno’s wisdom comes in again.
Ohno’s critical observation was that the speed of current automobile production systems in Detroit was increasing waste, as Brian Appleyard explains in “The Car: The Rise and Fall of the Machine that Made the Modern World.” Managers were using the speed of the fastest worker to determine the speed of production lines, producing errors that required costly corrections later. Ohno decided to prioritize quality over speed, giving every worker license to stop the entire production line if he or she detected a fault. By empowering workers to ensure quality during the building process, Ohno was able to cut out the need in factories for separate sections meant to correct faults, and in doing so, accelerated overall order fulfillment speed.
Current activity-based aid is like a faulty assembly line that no one wants to stop. Results-based funding, in contrast, has parallels to the Toyota Production System in that it incentivizes and empowers service providers to focus on fit and quality of delivery.
Significant increases to results-based funding for projects can lead to vastly improved outcomes in the social and development sectors. The biggest promise of RBF would be to create different incentives and motivation to think critically about whether a program is really working and to actively look for and correct problems.
How do we get there?
A call to action
Accelerating industry use of results-based financing will require a concerted effort from stakeholders across different sectors, especially funders.
Foundations such as the Gates Foundation have historically contracted based on inputs and activities. There have recently been some shifts toward granting with unrestricted funding. This is good and shouldn’t change. Unrestricted resources can empower organizations to drive their own capacity development agendas in preparation to take on performance risk, and can be used as no-cost working capital, increasing the ability of service providers to confidently pursue outcomes contracts. However, foundations that are still contracting on the basis of inputs and activities should shift to contracting on the basis of meaningful results. Foundations can act as leaders, as they should be able to nimbly shift in this direction. Contracting either using unrestricted funding or on the basis of meaningful outcomes will represent a significant step forward for the world.
Development organizations such as the World Bank and UNICEF often have a mandate to support the implementation of social programs and services in low and middle-income countries. They can play a key role in promoting RBF as an effective and efficient funding approach and providing technical assistance and funding to support its implementation.
Government agencies can also be powerful drivers of RBF uptake. In and outside the U.S., government agencies should develop policy, regulatory and legal frameworks that encourage and support the implementation of RBF programs. In the U.S., there is an opportunity to make good on the promise of innovation by enacting into law the bipartisan bill known as Fostering Innovation in Global Development Act (FIGDA). The bill would authorize USAID to provide more flexible, results-oriented funding and to incentivize high-impact solutions to development challenges.
Funding based on results is a practical way to increase outcome achievement and ensure aid and philanthropic funding is used efficiently. But despite mounting evidence for this, change has been slow and the result is stalled progress and sometimes even worsening conditions for the people we’re trying to help. It’s time for philanthropy’s Toyota moment.
Celeste Brubaker serves as the Chief of Impact and Innovative Financing at Village Enterprise, spearheading organizational social outcomes contracting initiatives and ensuring the ongoing excellence of impact measurement programming.
Brian Boland is the co-founder of the Delta Fund, along with his wife Katie. The Delta Fund makes charitable grants and impact investments that focus on improving human agency around the world.