Innovative finance: social franchising and performance-based financing

How different innovative financing instruments as social franchising and result-based payments can increase and improve impact

agenda July 10, 2019

On Tuesday, July 2, the Community of Practice on Innovative Finance gathered to discuss two innovative financing instruments for development: social franchising and performance-based finance (PBF). For each, we invited two organisations to present their approach, which made the session an interactive exchange on alternative forms of the same instruments. Main takeaways of the session were: there is a spectrum of possibilities organisations may choose from, going from pure (social) franchises down to loose networks of partners, while performance-based finance is more than a financing tool and can instead be used to magnify impact.

Social franchising models for scaling impact
A social franchise is essentially the same as a commercial franchise (think of McDonald’s), but with a social mission. After Aflatoun’s presentation during the last session, this time it was up to Dance4Life (with their Youth Empowerment Model) and RNW Media (with their Love Matters programme) to share the similar yet different approaches to social franchising. Both ask their franchisees to pay membership fees in exchange for training, support, branding and access to the network, but for none of the two does this generate additional revenue for the organisation. In other words, for both this approach is not a business model to finance themselves but rather a cost-neutral agreement.

What is the added value of social franchising then? In general terms, this creates a higher level of ownership and critical attitude over the programmes, which stimulates innovation on both sides – for the franchiser and the franchisees. Moreover, this way organisations can scale up their impact. However, there is a crucial trade-off in the set-up of any franchise: how much quality control should the franchiser exercise on its partners, without limiting the scale of the desired impact? Both RNW Media and Dance4Life are rather flexible in this sense but apply different criteria, the former focusing more on a common, shared mission and the latter requiring a uniform (even though contextualised) curriculum across the network.

But if each organisation has a different model of social franchising, can we still speak of the same (innovative) financing instrument? In fact, we should say there is a spectrum of possibilities, going from a pure franchise (the “McDonald’s way”) down to a loose, global network. The common element among these forms is that there must be a replicable model at the basis – with a pure franchise being about a shared product and a global network more about a shared vision.

Performance-based financing: results first, payment after
The essence of Performance-based financing (PBF) is a move from input-based to output-based financing, with thereby a focus shift from activities to results – i.e. “what really matters”. Back in 2001, Cordaid was the first Dutch development NGO to introduce PBF in the health sector, but MaxFoundation has also recently introduced the Payment-by-Results model. Can PBF be a tool to increase impact? In terms of quantity, the answer might seem obvious – but can we say the same about improving the quality of such impact?

In fact, both Cordaid and MaxFoundation shared data from their programmes which show a significant increase in the verified number of people reached and helped. However, also in qualitative terms, Cordaid has witnessed a development in terms of teamwork and sense of ownership as well as improved infrastructures. Similarly, MaxFoundation’s PBF model generates a lot of data along the whole process, which results in a continuous feedback loop that allows for adjustments in real-time and creates room for improvement and innovation, especially amongst partner NGOs.

There is a crucial difference between Cordaid and Max Foundation as regards the financial management of this tool. For Cordaid, PBF is an additional financing provided on top of pre-existing (public) funding, while MaxFoundation uses it as an alternative, innovative way of financing its programmes by splitting the payment in two – an upfront payment (about 80%) and a second instalment (the remaining 20%) after the delivery of results. In both cases, however, the two organisations stressed the importance of introducing rigorous and strict verification mechanisms to avoid data cooking and to ensure the added value of such an approach in terms of impact.

If you’d like to know more about social franchising and performance-based financing, have a look at the minutes and PowerPoints of this meeting. You’ll find these in our Dropbox. During our next Community of Practice on Innovative Finance, we dive into local fundraising and blended finance. Sign up for the next session which will take place on August 29!

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