Points to consider when designing challenge funds: evidence from a systematic literature review

This brief article summarises some of the key insights from a review of the academic literature on challenge funds.[i] While the term ‘challenge fund’ appears in a large number of research papers, only a small proportion of these address Challenge Funds as a policy mechanism. This means that there is a limited amount of research-based knowledge. However, the research that does exist provides insight into important issues into both the organisation of Challenge Funds and the delivery of projects funded through Challenge Funds.

The key points that emerge from the literature review with regard to the key characteristics of challenge funds include:

1. The type of fund, with the main distinction being between enterprise orientated and socially orientated challenge funds. Both types are nevertheless interested in achieving positive economic outcomes.
2. Compared with similar types of funds, Challenge Funds tend to be more future orientated and to share risks with solution providers.

When it comes to the design and delivery of challenge funds there are a number of potential areas of tension that need to be taken into account. These include:

3. Funds need to strike a balance between using relatively more inclusive or more selective marketing strategies. Inclusive marketing strategies are accompanied by increased costs of managing unsuccessful applications, while selective strategies may reduce equity, but can allow funds achieve other goals such as rapid fund disbursement.
4. Bureaucratic monitoring can lead to Challenge Fund holders to focus on measurable impacts. But monitoring is important where there is little basis for trust between the Challenge Fund and a Challenge responder.
5. The evidence and mechanisms of evaluation are important but potentially tricky to design. For example, to be innovative, challenge holders and innovators need to be allowed the room to experiment in areas in which there is a paucity of evidence. This creates challenges for funds that need to demonstrate value for money.
6. There are also technical and potentially political areas to consider in designing and delivering challenge funds. In demonstrating the impact of such funding, it is important to identify the extent to which the Fund itself is making a difference, particularly given the variety of activities that a Challenge Fund may support. While there was no direct reporting of this in the literature, fund managers will need to be aware of the possibility of political interference in the operation of the fund, for example with regard to the support of specific challenge proposals or innovator solutions.

The literature also reports on a number of choices that are to be taken in the operational specifics of challenge funds. These include differing approaches to the management of funds and with regard to how proposals for challenge funding are organized and managed:

7. The financial management involved in a challenge fund can be provided by an external company, a third-party partner or in-house by a dedicated fund manager. The literature suggests that the process of developing the contract between the fund holder and the challenge holder creates the opportunity for a great deal of discretion and negotiation.
8. When it comes both to the financials and also other delivery aspects, fund managers can take a light touch approach or be more hands-on. Managers may find they more closely manage and supervise activities where these challenges are less aligned with the organisational goals of the challenge holders. Conversely, where there is greater alignment, Challenge Funds have tended to use a more light-touch approach.

Finally, when it comes to potential problems that might be confronted in practice, the literature review highlighted a small number of issues which includes:

9. Past research has indicated that the process of bidding for funding from prospective challenge holders may result in communication problems between the bidder and the fund, for example with regard to the degree of ambition and innovation that is expected.
10. Moreover, evidence suggests that the process of bidding to Challenge Funds has tended to reward bid presentation and reward more readily observable measures.
11. The issue of measures and measurement is also a potential difficulty in delivery. Bureaucratic monitoring can lead to Challenge Fund holders to focus on measurable impacts which constrains innovation and risk-taking. Nonetheless, monitoring is seen to be important where there is not an established relationship and existing basis for trust between the Challenge Fund and a challenge owner.

We will consider a number of these points in more detail in subsequent articles.

Overall, the research literature is supportive of the use of Challenges Funds as a mechanism aimed at achieving innovation. However, Challenge Funds are not a simple solution to the challenge of introducing innovation to policy areas, and the structure and delivery of projects through Challenge Funds requires careful reflection.

The Cardiff Capital Region Local Wealth Building Fund has been designed and developed in a partnership between the Cardiff Capital Region and Cardiff University. This has meant that we have been able to access existing thinking and evidence on challenge funds through mechanisms such as this literature review and also by interviewing experts and interested parties. This process of research and reflection is ongoing through the continuing development of the initiative.

[i] A search of the Web of Knowledge for articles containing the term “challenge fund” in any field, was conducted in December 2021. Focusing on the term ‘Challenge Fund’ allows us to identify articles that are concerned with this specific kind of fund. Alternative terms, for example, challenge prize, managed fund, open research grant – each refer to different funding mechanisms and so the decision was made to focus on “Challenge Fund” for this research. Focusing on this term, 2,413 potentially relevant articles were identified using the Web of Knowledge database. However, focusing on specific fields yields far fewer results. The term “challenge fund” appears in the abstracts of just 22 articles. Of the papers that do explore Challenge Funds in specific terms, four focus on the experience of the Single Regeneration Budget in the 1990s, one examines the construction of ‘community’ by a Challenge Fund (Aiken, 2014), and one explores the justification for funding small NGOs by the UK Civil Society Challenge Fund. Only two papers address the mechanism of the delivery of a Challenge Fund (Foley, 1999, Copestake and O’Riordan, 2015). Clearly, this suggests there is a paucity of academic research evidence on Challenge Funds despite the fact that Challenge Funds have funded evaluations since their early days. These evaluations have focused on the programmes introduced by Challenge Funds (for example, McDonald, 2015) with fewer focusing specifically on the Challenge Fund as a mechanism.