Barriers and opportunities in outcome-based contracting for enabling social innovation: insights from a collaborative, public−private pilot project in Italy Open Access

In recent decades, societies worldwide have increasingly confronted complex, systemic problems commonly described as “grand challenges” or “wicked problems” (Head, 2008). These issues are not only wide-ranging in scope but also deeply interdependent, defying linear solutions and requiring multifaceted responses (George et al., 2016 ; Ferraro et al., 2015). Public discourse often emphasizes that addressing grand challenges requires innovative approaches that go beyond traditional sectoral boundaries and institutional silos, suggesting the need for collaborative governance models that leverage diverse resources and expertise (Ansell and Gash, 2008; Ansell et al., 2024; George et al., 2023).

In this context, social innovation has rapidly attracted the attention of both policymakers and practitioners (Baglioni and Sinclair, 2018), as a promising response to the growing inability of traditional welfare systems to address complex social challenges (Phills et al., 2008; Mulgan, 2006). Although occupying a “contested conceptual space” (Ayob et al., 2016; Bragaglia, 2021) and being transdisciplinary in nature (Montgomery and Mazzei, 2021), social innovation is often associated with collaborative practices (Hartley et al., 2013; Mulgan, 2006), including collaborative innovation (Sørensen and Torfing, 2015, 2017), and co-production and co-creation (Brandsen and Honingh, 2016). Defined as the development of new practices, partnerships and governance models that create social value, social innovation emphasizes public−private collaboration, user engagement and experimentation (Ayob et al., 2016). In this sense, social innovation is seen as a practice that reconfigures the relationships between various societal actors, including citizens and/or civil society organizations, private organizations and public sector organizations, beyond simple cooperation, to jointly (re)design and deliver services and products to address societal needs and co-create value (Calò et al., 2024).

Public−private collaborations, also known as public−private partnerships (PPPs) in specific policy contexts (Tropeano et al., 2025; Vecchi et al., 2021), are regarded as a form of organizing for social innovation (Calò et al., 2024), enabling diverse actors to co-create and implement innovative solutions to complex societal challenges by means of formalized contracts (de Vries and Yehoue, 2013). These partnerships challenge traditional notions of organizations as isolated innovators (Phillips et al., 2015) by establishing new norms, values and rules that challenge the status quo of traditional governance models of public services and encourage innovation through shared resources and collaborative practices (Albertson et al., 2018; Tropeano et al., 2024). Within these collaborations, outcome-based contracts (OBCs) are praised as an example of PPP for social innovation (Olson et al., 2024).

Unlike traditional public procurement services that remunerate providers based on activities and outputs, OBCs are public−private contracts for service design and provision that tie payments directly to the achievement of specific social outcomes (Fitzgerald et al., 2019; Lazzarini, 2022). This approach encourages service providers to focus on delivering measurable and impactful results, thereby incentivizing participatory innovation in service delivery to solve societal problems (De Pieri et al., 2023; Hodge and Greve, 2007). By linking financial rewards to tangible outcomes, OBCs may support, at least in theory, a more dynamic and adaptive form of collaboration, where public−private partners, including governments, private investors and service providers, are aligned in the design and pursuit of shared social goals through innovative services (Hevenstone et al., 2020). In the light of public budget cuts and concerns over financing public services, particularly regarding innovation and responsiveness to wicked problems, OBCs have gained greater prominence in policymaking, encouraging a shift toward more collaborative, results-oriented models of governance that promote collaborative innovation across sectors and address society’s most pressing challenges (Dowling, 2017; Edmiston and Nicholls, 2017). However, despite the theoretical appeal and growing global experimentation, the transformative potential of OBCs as public−private form for enabling social innovation is relatively under-explored and contested (Olson et al., 2024). Research on OBCs has mostly emphasized financial and contractual aspects, overlooking their role in reshaping governance and fostering inclusive social innovation in public service reforms (Mazzei et al., 2025). This study addresses this gap by examining OBCs not only as technical tools but as contested arenas where cultural, institutional and ethical dimensions of collaborative governance are negotiated. It advances debates on their transformative potential beyond financialization, offering insights into contractual dynamics and governance tensions that clarify both their promise and their limits.

In this paper, we seek to contribute to this debate by answering the following research question (RQ):

To achieve our aim and answer our RQ, we use qualitative methods (i.e. interviews and non-participants observations of project meetings) focusing on a large, ongoing public−private project of OBCs in Italy. By following the project from its early design stages through the negotiation of contracts, we investigate the dynamics that either support or constrain its capacity to drive social innovation. We examine how OBCs interact with the conditions required for social innovation to emerge, such as fostering new forms of collaboration among public institutions, private actors and civil society, enabling shared responsibility in designing and implementing services and generating novel responses to pressing societal challenges.

Through our paper, we aim to situate OBCs within the broader social innovation discourse (Olson et al., 2024), arguing that these models for enabling social innovation can only drive transformative change if ethical principles and human-centered values are systematically embedded in their design and implementation.

Social innovation has emerged as a key concept in both academic research and policy agendas, especially in response to the increasing limitations of traditional welfare systems in tackling complex and evolving social challenges (Baglioni and Sinclair, 2018; Slimani, 2013). In the literature, social innovation is generally understood as the development and implementation of new ideas, services and organizational models that aim to improve social outcomes and generate public value (Phills et al., 2008; Kanter, 1999). Unlike traditional models of service delivery, which often emphasize cost control, standardization and procedural compliance, social innovation shifts the attention toward experimentation, inclusion and collaborative responsiveness to societal needs (Bason, 2018; Lyon, 2012; Mulgan, 2006; Neyland et al., 2019). Ethics emerges as a substantial element of social innovation. Ims and Zsolnai (2014) argue that exemplary initiatives prioritize the reduction of suffering, the empowerment of individuals and the strengthening of communities over the pursuit of profit. This ethical foundation interprets social innovation in a broader way, considering social responsibility as a central element of innovation processes. Similarly, these aspects are also decisive in the literature on OBCs. Innovation processes often risk reproducing existing power asymmetries (J. Ims and Zsolnai, 2014), while Galego et al. (2021) emphasize the importance of co-producing knowledge to ensure that different voices and experiences are truly included. These perspectives invite us to take a more critical stance toward OBCs, emphasizing the need to view these instruments not only as contractual innovations, but also as tools that can reinforce or challenge structural inequalities in governance and that can express their potential for social innovation in this space.

At the heart of social innovation lies the idea of collaborative value creation (Hartley et al., 2013), where public, private, third sector actors and citizens work together to co-produce services that are more effective and also more inclusive and responsive to the lived experiences of target populations (Ziegler, 2010). These collaborations, in theory, go beyond mere cooperation, outsourcing or privatization, aiming instead to leverage the unique resources, expertise and perspectives of each sector to design and deliver innovative services that address unmet social needs (Brandsen and Honingh, 2016). Particularly in periods of financial austerity, social innovation has been embraced as a strategic avenue for unlocking additional resources and capacities that neither the public nor the private sector could mobilize independently (Elkington et al., 2006; Galego et al., 2021).

While social innovation could take several forms or occupy a contested space, from specific ideas, rules and regulations (Nicholls et al., 2015) to concepts, strategies and tools (Dawson and Daniel, 2010), the concept is often associated, at least from an organizing perspective, with PPPs as an open process of collaboration between diverse stakeholders (e.g. policymakers, businesses, nonprofit organizations and citizens) that changes the relationship between them by crossing organizational borders and authority, with the main goal of fostering the creation, selection and implementation of solutions that aim to address societal needs, contributing to the improvement of the quality of life more effectively and fairly than existing options (Calò et al., 2024; Temmerman et al., 2021).

Enabling social innovation through PPPs presents opportunities due to the diversity of actors involved. This heterogeneity can stimulate innovation but also introduces complexity that is often difficult to manage. The literature highlights that the success of social innovation depends on both external conditions, such as the political and institutional environment, and dynamics within the partnerships, including the nature of agreements among social innovation stakeholders (Neumeier, 2017). Crucial to these dynamics are stakeholders alignment and the reduction of institutional resistance (Oeij et al., 2019), supported by policy frameworks that reward long-term social value over short-term outputs (Pol and Ville, 2009). Public administrations also play a central role, not only as funders or regulators, but as facilitators of inclusive governance processes that engage users, citizens and civil society organizations in co-designing solutions (Cajaiba-Santana, 2014).

Yet, these same collaborative arrangements face a series of challenges that hinder the opportunity for PPPs to enable social innovation. Power asymmetries can distort decision-making and erode trust, while complex governance structures complicate role definition and social value measurement (Koliba and Meek, 2017; Selsky, 2005). Limited flexibility further constrains the ability of PPPs to adapt to evolving needs; although public−private collaboration can create mutual interdependencies that can foster innovation for the common good, these interactions often bring friction and barriers (Bozic, 2020). For example, research suggests that the effectiveness of such partnerships depends heavily on governance capacities (Weber et al., 2022). Furthermore, several structural obstacles can hinder the systemic enabling of social innovation through PPPs, such as institutional inertia, fragmented policy regimes, insufficient managerial and entrepreneurial capacity in public administration and the lack of robust metrics for evaluating social outcomes (Bouchard, 2012).

OBCs represent a more recent and experimental PPP form for reconfiguring and governing collaborations across sectors, potentially enabling social innovation through contractual and financial mechanisms tied to the achievement of social outcomes (Bozic, 2020). Rather than merely outsourcing service provision, OBCs attempt to embed an impact-oriented logic that incentivizes collaborations to respond more directly and measurably to societal needs. This outcome orientation is not just technical; it introduces a shift in how public goals are defined, pursued and evaluated, reframing the relationship between the state, private actors and civil society within welfare and social policy domains (Fox, 2011; de Vries and Yehoue, 2013). In this sense, OBCs aim to commit partnerships to forms of collaboration that go beyond transactional contracting (Carter et al., 2024; Fraser et al., 2018), seeking instead to scale social innovation through negotiated objectives and adaptive delivery (Olson et al., 2024).

In the literature, OBCs proponents argue that by tying payments to measurable outcomes rather than specific inputs or outputs can create conditions more conducive to social innovation experimentation, user-centered design and local adaptation (Edmiston and Nicholls, 2017). Social innovations emerge when markets fail and there is a need to create social rather than private value. To avoid dysfunctional effects, the innovation process must reflect underlying values, focusing on social outcomes rather than resources or outputs (Grønhaug, and Kaufmann, 1998).

Theoretically, this can allow for more ethics-driven, flexible and innovative interventions while promoting greater accountability for results. Furthermore, by drawing in third sector organizations and socially oriented providers, OBCs are supposed to enable pluralism into service ecosystems and enhance participatory dimensions of service design (Albertson et al., 2018; Pattison, 2012). Some accounts highlight their potential to mobilize resources from social investors, reduce fiscal pressure on public budgets and increase transparency through the involvement of independent evaluators (Fitzgerald et al., 2019; Morano et al., 2020; Rizzello and Kabli, 2020).

Yet, the narrative surrounding OBCs as a method to enable social innovation remains contested. While they may reflect key principles associated with social innovation, such as outcome orientation, open collaboration and experimentation, whether these OBC elements are effectively realized in practice remains an open question (Olson et al., 2024). The assumption that contractual frameworks can steer diverse actors toward collaborative, user-responsive solutions rests on a supposed high degree of institutional maturity, trust and managerial competence (Broccardo et al., 2020). Without these, the promised flexibility of OBCs may remain theoretical, and contractual rigidity or administrative burdens may reproduce many of the limitations they aim to overcome (Albertson et al., 2018; Fox, 2011; GO Lab, 2019). Moreover, the reliance on predefined and measurable outcomes may introduce new tensions. Although measurement is essential for accountability in OBCs, the tendency to prioritize easily quantifiable indicators may distort service goals, constrain innovation or marginalize complex and less measurable forms of social value creation (Albertson et al., 2018; Fox, 2011). These tensions are further amplified in large-scale programs, where the need for control and risk mitigation often leads to standardized outcome frameworks that leave little space for local experimentation or genuine co-production. In this respect, the very logic that defines OBCs may conflict with the relational and processual dimensions of social innovation, which are often emergent, iterative and embedded in specific contexts (Bovaird and Davies, 2011; Temmerman et al., 2021). Furthermore, the financial logic underpinning OBCs introduces additional issues. Although mobilizing private capital through outcome-based financing mechanisms, such as social impact bonds (SIBs), may expand the funding base for social interventions (Olson et al., 2024), it also introduces new expectations around risk management and returns on investment (Fitzgerald et al., 2019). This can shift attention from public value to financial viability, potentially narrowing the scope of social objectives to those that produce demonstrable fiscal savings. Critics argue that this dynamic risks subordinating inclusive, long-term goals to short-term, efficiency-driven metrics, thereby diluting the emancipatory ambitions of social innovation (Albertson et al., 2018). Also, OBCs cannot be assumed to produce socially innovative outcomes by design. Their effectiveness depends on the interaction between contractual structures, the capacities of involved actors and broader institutional and policy environments. Factors such as the definition of outcomes, the inclusiveness of the design process, the degree of autonomy granted to providers and the presence of learning mechanisms all condition the extent to which OBCs enable meaningful collaboration and innovation (Fitzgerald et al., 2019; GO Lab, 2019). Contextual factors also significantly shape whether OBCs can support innovative services for social outcomes. While some countries have seen a proliferation of OBCs, others have experienced considerable difficulty in adopting them, especially where administrative systems are highly centralized or resistant to outcome-based governance. In coordinated market economies or conservative welfare regimes, longstanding policy traditions, limited local capacity and risk-averse administrative cultures have hampered the diffusion of OBCs at scale (Fox, 2011; de Vries and Yehoue, 2013). Recent research further highlights that, for example in the Italian context, the public sector mainly lacks the necessary skills and infrastructure to effectively implement outcome-based instruments. These gaps could be addressed through nation-wide capacity building initiatives and improved systems for data storage and contract management (Morando and Romagnolo, 2024).

Finally, rather than embracing OBCs as inherently transformative for enabling social innovation, it is more productive to explore them as contested governance tools whose ability to enable social innovation depends on how they are negotiated, implemented and adapted within specific contexts (Carter et al., 2024; Olson et al., 2024).

The empirical setting of this study is a relatively large public−private initiative in Italy aimed at supporting the inclusion of young in the job market through a series of innovative services designed to address the root causes of their exclusion. This program, which we will name NetImpact, represents one of the earliest pilot and ongoing applications of OBCs in the Italian context. It brings together a consortium of actors, including local government agencies, third sector organizations and educational institutions, coordinated through outcome-based agreements in which payments to service providers are contingent upon the achievement of predefined social outcomes, such as sustained employment and re-entry into education. Structured as an outcome fund (GO Lab, 2019), the program seeks to mobilize up to €10m to support a portfolio of OBCs, including SIBs, which are developed and implemented either in parallel or in close succession. In the case of SIBs, private investors provide upfront capital to fund the delivery of services and take on financial risk, with the promise of repayment, potentially with interest by a public or socially oriented outcome payer, only if agreed social outcomes are successfully achieved and independently verified. This model is intended to unlock new financial resources for preventive and socially innovative interventions that might otherwise remain underfunded within traditional public budgeting frameworks.

The Italian experience with OBCs has been extremely limited. Although PPPs were formally introduced in 1998 (Rossi and Civitillo, 2014) in the country, their implementation as OBCs has historically struggled compared to other European countries (Giorgiantonio, 2019; Rossi and Civitillo, 2014). In recent years, however, PPPs have re-emerged as strategic instruments within the Plan for National Recovery and Resilience (PNRR), aiming to mobilize private capital to support public sector modernization and service delivery (Siclari, 2022). Indeed, the PNRR emphasizes performance-based governance models, opening a potential window for the experimentation of OBCs in the country. Indeed, Italy presents notable enabling conditions for OBCs’ experimentation. The country benefits from an active third sector, a growing ecosystem of social finance institutions, and recent legislative reforms, such as the 2016 Third Sector Reform, which have improved the regulatory environment for social enterprises (Bengo and Calderini, 2016; Corvo and Pastore, 2019). Regional and municipal authorities have expressed interest in exploring OBCs as tools to align local action with European and national policy objectives (Corvo and Pastore, 2019). Furthermore, research networks and knowledge hubs have started to build awareness around impact investing and social innovation practices (Corvo and Pastore, 2019).

In the Italian context, OBCs are increasingly promoted as policy tools to support social innovation by reorienting governance models, relationships and intervention strategies toward the generation of social value (Trotta et al., 2020). Their relevance is particularly evident in policy domains such as employment and training for vulnerable groups, as well as in health-care prevention targeting fragile populations, such as the elderly (Trotta et al., 2020). Moreover, the potential integration of PNRR resources within outcome-based frameworks is seen as a strategic opportunity to enhance public administrations’ ability to cultivate more effective and innovation-oriented ecosystems (Social Impact Agenda per l’Italia, 2016).

To explore key barriers and enabling factors that shape the potential of OBCs to foster social innovation through NetImpact, we conducted case study research using qualitative data collection methods. Given the exploratory nature of the research, and the complexity inherent in multi-actor arrangements involving public agencies, private providers and third sector organizations, qualitative methods were particularly appropriate to capture the depth, contextual specificity and processual features of NetImpact implementation (Creswell and Poth, 2018; Yin, 2018). The case study approach allowed us to conduct an in-depth analysis of NetImpact practices as they unfold over time, offering rich empirical insights into the extents to which OBCs operate as an instrument for enabling social innovation within a specific institutional and policy environment.

Two primary qualitative data collection methods were used: semistructured interviews and non-participants observation of project meetings. The combination of these methods allowed for triangulation and contextualization of emerging findings (Yin, 2018). Alongside primary data collection, we conducted a review of the project documents. Semistructured interviews were conducted with 15 representatives from the NetImpact project, including two practitioners from two social enterprises, three civil servants, three social impact experts, four impact investors and six representatives from both private and public outcome payers to collect in-depth accounts of actors’ experiences, perceptions and practices related to the outcome fund project design and implementation and its barriers or facilitators for social innovation. Participants were selected through maximum variation sampling (Jackson, 2007) covering all the levels of participation in the project governance: local and regional public officials, social enterprises directly involved in service provision, impact investors financing contracts and experts providing technical advice. Interviews were conducted between May and September 2024 via Microsoft Teams, with prior informed consent for recording. Each interview lasted approximately 1 h and was conducted in Italian.

In parallel, non-participants’ observations were conducted through systematic attendance of weekly project board meetings responsible for the design and implementation of the outcome fund. These meetings, held regularly during the same period, provided longitudinal insights into the project as it unfolded. Detailed fieldnotes were collected for each meeting, which served to supplement and contextualize the interview data (Braun and Clarke, 2006; Guest et al., 2012).

The qualitative data collected were analyzed using thematic analysis, a widely recognized method for identifying and interpreting patterns of meaning within qualitative data (Braun and Clarke, 2006). This method was particularly suitable for the exploratory nature of this study, allowing for a systematic yet flexible examination of the participants’ experiences and perceptions (Nowell et al., 2017). The interview data were systematically compared with non-participant observations from weekly meetings and official project documentation, allowing us to compare and validate the themes that emerged from the interviews, meetings and coding. Data were coded independently by the first author, after which the second and third authors independently reviewed the codes. Consensus on the analysis output was then achieved during meetings among the authors.

The analytic process followed an abductive and iterative logic, beginning with repeated reading and open coding of all data sources: interview transcripts, non-participants’ observation notes and relevant documentation. Initial codes were generated to capture emerging insights related to governance arrangements, enabling conditions, barriers and cross-sector coordination mechanisms. These codes were progressively refined and grouped into different themes (Braun and Clarke, 2006; Guest et al., 2012). Throughout the analysis, empirical findings were linked back to existing literature to ensure theoretical coherence (Yin, 2018). To enhance the reliability and validity of the findings, peer debriefing sessions were conducted within the research team (Creswell and Poth, 2018). Attention was also paid to capturing both convergent and divergent views across actors, as well as to identifying any temporal shifts in perceptions and practices over the course of the project. The resulting thematic framework informed the presentation of results, offering a structured interpretation of how OBCs are perceived, negotiated and operationalized as governance tools for social innovation within the Italian public service system.

The results are presented in four themes that capture the key barriers and enabling factors of OBCs to foster social innovation:

1. mindset and resistance;

2. cross-sector frictions;

3. outcome measurement; and

4. coordination and control.

All interviewees highlighted that a major barrier to the implementation of OBCs in Italy is cultural, rooted in a prevailing mindset that emphasizes inputs and cost containment over outcomes. This orientation toward traditional resource allocation and financial control undermines the potential of OBCs and, by extension, limits the realization of social innovation through such tools. The difficulty in shifting public and private investor focus on measurable results from social interventions was consistently noted. In this context, one respondent stated:

During our participation in NetImpact meetings, participants emphasized how this cultural resistance restricts the experimentation and adaptability that social innovation requires. Without a results-oriented culture, outcome-based tools struggle to gain legitimacy, making it difficult for public institutions to support or scale innovative approaches. Participants noted that the existing system imposes rigid layers of checks and controls that may complicate the practical adoption of outcome-based tools, discouraging public administrators from exploring innovative approaches, keeping them tied to traditional, rigid contractual models that lack flexibility and collaborative governance. This suggests that the absence of effective networking and communication structures across diverse actors could not only reinforce cultural inertia but also prevent the creation of interface mechanisms that could foster self-reflexivity and institutional learning, which are crucial for improving service quality and legitimizing innovative practices (Massey and Johnston-Miller, 2016).

From our interviews, it also emerged that a challenge is related to understanding the indirect impact that OBCs can create. It is not just about measuring the immediate, visible impact but also demonstrating that the creation of an innovative marketplace through OBCs could bring both local and cultural benefits. These benefits include fostering a results-oriented mindset among financiers and public administrations. One proposed incentive is the establishment of results-based schemes by administrations:

From our non-participants’ observations, another important barrier that emerged is bureaucratic. The Italian legal and administrative system presents significant cultural and structural barriers that can hinder the adoption of outcome-based tools. The interviews indicated that one of the primary obstacles to the introduction of OBCs is the practical difficulty linked to bureaucratic procedures and the lack of specialized expertise. This creates a reputational risk for public administrations, as they fear not meeting the objectives of innovative projects, leading them to avoid pursuing these solutions:

Respondents frequently pointed to the lack of a clear legal framework as a key barrier. Stronger legal support, they argued, could reduce political and bureaucratic resistance and give administrations more confidence to experiment. Yet in practice, the absence of clarity often blurred the line between technical and bureaucratic obstacles. A recurring difficulty concerned the mismatch between public resource planning and the long-term outcomes to be evaluated, as seen in attempts to implement OBCs in Italy. Administrators struggled with the idea of spending more today without the guarantee of immediate returns. As one civil servant explained:

This ambivalence suggests that barriers are not only technical but embedded in governance dynamics, where legal clarity, though demanded, can end up reinforcing rigidity rather than enabling innovation (Cummings et al., 2021; Galego et al., 2021).

The various stakeholders interviewed represented diverse perspectives, shaped by their prior experience across sectors and institutional contexts. This diversity revealed a range of expectations about the institutional roles and dynamics within outcome-based contracts. A central opportunity that emerged is the potential of these instruments to foster more integrated forms of collaboration between actors, going beyond transactional partnerships. By mobilizing complementary capacities, financial, managerial, operational, OBCs offer a platform for aligning public, private and third sector actors around shared outcomes. This alignment is perceived as critical for reinforcing the ecosystem of social innovation.

First, OBCs mechanisms are viewed, by interviews, as a way to redistribute innovation risk. In contexts where the welfare system covers only part of essential services, unmet social and environmental needs open space for outcome-based approaches to act as policy complements rather than substitutes. The presence of private actors in such arrangements is not necessarily seen as a form of privatization, but rather as a way to expand the scope of intervention. For example, in words of one of our interviewees:

In this framing, the private sector involvement is valued not only for its resources but also for its potential to introduce agility and risk-taking capacity into typically rigid administrative systems:

However, according to our respondents, the same mechanisms enabling social innovation through OBCs can also carry risks. A recurrent concern relates to the introduction of market-driven logics into social service provision. The performance-based structure of OBCs, particularly when tied to private investment and interest repayment, may pressure providers to prioritize easily attainable results, thereby marginalizing more complex or vulnerable beneficiaries. This raises the risk of mission drift, especially for third sector organizations traditionally rooted in equity-oriented values. For example, one respondent said that:

Tensions also emerged around the technical and institutional readiness of financial actors to participate meaningfully in OBC structures. While showing enthusiasm driven by the commercial potential of these models, impact investors expressed concerns about the underlying risk-sharing logic of OBCs. There was a clear preference for financial arrangements that preserve institutional norms, such as capital protection and standardized contracts, over models that require deeper integration or shared financial exposure:

Concerns were also raised about pooled management, with investors preferring a simpler structure with standardized contracts between the investor and the service provider. This approach is seen as more efficient because it aligns better with traditional arrangements. For example, Investor 2 expressed doubts about the legal complexity of managing a pool of lenders in the absence of a strong legal link between participants, suggesting that the proposed structure might be too time-consuming and impractical from both a legal and operational perspective. While there is generally strong openness to incorporating social innovation and impact criteria in the selection process, creditworthiness remains the primary concern. Even when social impact is significant, the financial solidity of the service provider continues to be a decisive factor:

Administrative and regulatory barriers further constrain the OBCs’ potential for social innovation. Discussions among our respondents revealed the persistent difficulty of managing financial flows across actors, particularly when public funding, such as regional or European resources, is involved. The origin of funds critically shapes the legal and operational context, with state aid regulations often introducing additional layers of bureaucracy. This makes repayment to investors with public funds particularly difficult to justify, prompting a shift toward symbolic or reputational rewards:

To address these institutional rigidities, proposals emerged for simplified outcome-based reporting models, such as pre-approved budgets linked to results, rather than exhaustive cost-tracking. These would provide greater operational flexibility and reduce administrative burden for service providers:

Ultimately, our data suggest that NetImpact actors view the bureaucratic and legal constraints surrounding OBCs not merely as technical hurdles, but as manifestations of deeper structural tensions. During project meetings, they emphasized that the collaborative logic underpinning these instruments often conflicts with the siloed, control-oriented institutional cultures that characterize public service delivery. At the same time, they recognized that this very complexity could create opportunities for governance experimentation. In the context of the pilot projects, collaboration is increasingly being framed not just as a means to an end, but as a problem-solving mechanism in itself, an adaptive strategy for navigating and overcoming the systemic inertia embedded in both public and private organizational routines.

Outcome measurement emerged as a critical dimension of the pilot project. Participants acknowledged that robust measurement is essential to ensure that OBCs have a social impact. However, measuring results often involves an inherent tension: although presented as a neutral technical tool, it can become a vehicle for reinforcing managerial logic and pseudo-participatory governance, reducing innovation to what can be codified bureaucratically (Galego et al., 2021). Thus, operationalizing the results in practice proved much more difficult than expected. One interviewee highlighted the gap between measuring activities and capturing meaningful change:

Respondents noted that existing data systems were often inadequate, fragmented or inconsistent across organizations, limiting the ability to track long-term outcomes or verify results with confidence. Several interviewees also warned against limiting service delivery to what is easily measurable, potentially excluding important but less quantifiable dimensions of social change:

As discussed during the project meetings, skill gaps across both the public and private sectors may further constrain efforts to implement OBCs effectively, particularly in relation to outcome measurement. Limited expertise in defining appropriate indicators, collecting reliable data and using evidence for learning and adaptation emerged as a recurring concern. Participants stressed the importance of a clear and shared understanding of expectations, objectives and intended outcomes, arguing that this is essential for strategic and effective management, rather than simply fulfilling reporting requirements. A significant risk identified in the discussions is the potential for outcome measurement within OBCs to be reduced to a compliance exercise. Such a shift would generate dysfunctional effects (J. Ims and Zsolnai, 2014), distorting the approach and undermining its transformative potential, ultimately reducing it to a mere mechanism of accountability rather than a driver of innovation.

A broader theme that emerged is the pressing need for capacity-building and cultural change. The lack of necessary skills and strategic vision within both public administrations and private sector actors appears to represent a more substantial barrier than the often-cited bureaucratic and administrative constraints in the Italian context. Technical limitations were particularly evident in relation to impact measurement, where many public institutions lack the internal expertise required for effective oversight and learning. As Civil Servant 1 acknowledged, despite progress in legal and financial planning, the capacity to measure and evaluate impact remains a persistent challenge:

From our interviews, the importance of understanding and measuring indirect outcomes emerged. Without institutionalized processes for collective learning and reflection, measurement risks becoming a fragmented exercise, disconnected from broader social transformation (Mazzei et al., 2025). The ability to demonstrate that an innovative outcome-based fund generates benefits beyond the immediate results is crucial for long-term success:

Difficulties related to measurement skills are not unique to public administrations but also affect service providers, especially smaller ones. Social impact expert 3 explains that small third sector organizations face difficulties in measuring outcomes due to their limited capacity to manage complex projects and impact measurement processes.

The final theme concerns the complex power dynamics and governance tensions that emerged during the pilot project. While the involvement of private investors and service providers brings innovative resources and capabilities, several public officials expressed concerns about the concentration of influence among these actors. Multi-stakeholder governance arrangements, characterized by overlapping roles, contractual complexity and fragmented lines of responsibility, created significant challenges for coordination. Such multi-actor governance arrangements can easily reproduce asymmetric power relations, where formal collaboration masks underlying hierarchies and reinforces managerial logics rather than redistributing authority (Galego et al., 2021). Nevertheless, some participants noted that ongoing collaborative practices, such as joint meetings and shared problem-solving spaces, helped to ease tensions and supported the gradual development of mutual understanding among actors. As one civil servant explained:

Mutual learning in social innovation depends on an ethical commitment to the common good rather than on pragmatic compromise alone; without such an ethos, collaboration risks becoming merely instrumental, privileging efficiency over transformation (Ims and Zsolnai, 2014). In our project meetings, many governance and technical challenges were discussed as addressable through targeted capacity-building. A dedicated phase of the pilot was therefore designed to strengthen providers’ skills in financial management, impact measurement and inter-organizational coordination, enabling more effective engagement with the contractual framework. At the same time, discussions among actors underlined the need to balance cooperation and autonomy in OBC governance. While collaboration fosters accountability and coordination, excessive interdependence can reduce flexibility and responsiveness, making transparency, clear roles, shared expectations and appropriate competencies essential for long-term effectiveness (Mazzei et al., 2025).

This paper set out to examine the potential and limitations of OBCs as instruments to enable social innovation, using a pilot project in Italy as a case study. While OBCs have been discussed in conjunction with social innovation as potential enabling tools, evidence supporting this link remains limited and contested (Olson et al., 2024). The findings of this study contribute to understanding the barriers and enabling conditions that shape the use of OBCs for social innovation, particularly in contexts characterized by institutional rigidity and complex governance arrangements. By addressing ethical and critical perspectives, this study aims to contribute to debating how contractual innovations interact with broader governance values. Our case suggests that OBCs potential to foster social innovation depends on the contractual structure, administrative capacity and also the integration of ethical considerations into governance frameworks.

Our findings point to deep-rooted cultural and administrative constraints that limit the operationalization of OBCs. Despite rhetorical support for results-based approaches, day-to-day administrative practices continue to be shaped by input-driven logics, legal compliance and short-term budgetary considerations. These dynamics echo previous studies that have highlighted the tension between formal adoption of innovation-oriented tools and the persistence of legacy governance models (Bengo and Calderini, 2016; Corvo and Pastore, 2019). This tension is not only operational but also substantive. Indeed, the discourse supporting the political agenda of intergovernmental institutions (e.g. European Commission and OECD) reveals its inherent neo-liberal rhetoric, whereby social innovation is presented as a substitute for the state’s responsibilities to provide welfare services (Galego et al., 2021). Within such a framework, OBCs risk being absorbed into existing procedural routines, limiting their capacity to stimulate new social innovation practices or reconfigure institutional roles. However, evidence shows that social innovation initiatives are more likely to succeed when they are firmly rooted in the local sociocultural context (Galego et al., 2021). In this perspective, OBCs have the potential to become vehicles for institutional change, as they combine local political opportunities with organizational strategies aimed at addressing neglected basic needs and reclaiming alienated human rights. In this regard, evidence from the Italian context suggests that, while significant challenges remain in terms of administrative capacity and infrastructure, the adoption of OBCs nonetheless holds the potential to enhance the efficiency and efficacy of public interventions through nation-wide capacity building initiatives (Morando and Romagnolo, 2024) enabling social innovation.

The role of private sector involvement in OBCs remains a point of debate in both policy and academic discussions, particularly regarding the appropriateness of introducing market-oriented mechanisms into public service delivery (Fraser et al., 2018). While some critiques raise concerns about the potential for such instruments to shift priorities away from public value, our findings suggest that OBCs may also be viewed as a way to channel private sector participation toward defined social goals. Our findings suggest that private actors are not necessarily seen as a threat to public service values; rather they can represent partners capable of sharing risk and contributing to innovation, albeit within a framework that requires careful oversight and alignment with broader social objectives.

Nonetheless, our results also highlight that concerns persist about the potential behavioral consequences of payment-by-results mechanisms. Several participants pointed to the risk that financial incentives may encourage service providers to prioritize easily achievable or measurable outcomes at the expense of more complex, long-term or equitable goals. This supports broader critiques of metric-driven governance, which warn that performance indicators can displace intrinsic motivations and distort organizational behavior. In the case of third sector organizations, whose legitimacy often derives from their commitment to social missions, this tension appears particularly acute.

The challenge of defining and measuring outcomes emerged as another critical barrier. Although outcome measurement is central to the logic of OBCs, the study reveals how conceptual ambiguities, fragmented data systems and limited technical expertise could make it difficult to operationalize results in ways that meaningfully inform learning and accountability. Several participants warned that focusing too narrowly on quantifiable indicators risks oversimplifying the complex processes of social change and undermining the inclusive and participatory goals of social innovation. It seems to be crucial balancing measurement with flexibility, ensuring that metrics capture what matters to users and communities, not just what is easiest to count (Chen et al., 2020). Sensitivity to local cultural needs and an ethos for serving the common good appear as the preconditions of any successful and lasting social innovation by business (Ims and Zsolnai, 2014).

The challenges related to the measurement process in OBC include finding stakeholder agreement on the definition of outcomes, metrics and targets (Carter, 2021; Maier and Meyer, 2017). Developing a methodologically robust measurement process trusted by all stakeholders is costly, time-consuming and complex (Fox, 2011). Scholars have described lengthy negotiations regarding the design of the measurement process, balancing the needs and expectations of stakeholders and managing their bargaining power in defining outcomes and targets (De Pieri et al., 2023). From an ethical perspective, prioritizing what is easily measurable may marginalize vulnerable groups whose outcomes are less quantifiable, raising concerns about social justice (Cummings et al., 2021). Furthermore, the dominance of investors in contractual negotiations echoes criticisms that OBCs could accelerate the financializaton of social policies (Fraser et al., 2018).

Governance dynamics further complicate (and complete the picture). OBCs are meant to foster cross-sectoral partnerships, yet our study suggests how power asymmetries between public authorities, investors and service providers can weaken their quality. In several cases, private actors dominated contractual terms and implementation, raising concerns about accountability and the marginalization of public interest (Fraser et al., 2018). Fragmented governance and the absence of clear procedures add to these tensions, making coordination and trust difficult. Our case study suggests that OBCs can be systems able to drive social innovation, but risks of reinforcing market-oriented governance remains in several aspects (Fox, 2011; Warner, 2013). The emphasis on financial metrics reflects the danger of subordinating ethics and equity to efficiency (J. Ims and Zsolnai, 2014), while the exclusion of smaller third sector actors and service users points to pseudo-participation (Galego et al., 2021).

Despite these challenges, the results also suggest that OBCs can open up spaces for social innovation if implemented within supportive institutional environments. The experiences of collaboration, learning and problem-solving described by some participants indicate that, under the right conditions, OBCs could promote more adaptive and user-centered service models. However, realizing this potential requires going beyond technical solutions and addressing the broader cultural, organizational and systemic barriers that currently limit the transformative power of outcome-based approaches. In line with the social innovation literature (e.g. Calò et al., 2024; Galego et al., 2021; Hartley et al., 2013; Neumeier, 2017), our study highlights the importance of investing in enabling ecosystems that support experimentation, capacity building and collaborative governance. For Italy, leveraging ongoing policy initiatives, such as the PNRR, and building on recent reforms of the third sector, could create new opportunities to scale up results-based approaches in a manner consistent with social innovation principles.

However, this will require coordinated efforts to strengthen public sector leadership, develop robust impact measurement frameworks and promote inclusive governance models that align financial incentives with the creation of meaningful social value.

This article sought to explore the specific barriers that prevent OBCs from realizing their innovative potential in practice, using a longitudinal qualitative case study of a first pilot initiative in Northern Italy. While OBCs are often presented in the literature as governance tools capable of stimulating social innovation by aligning incentives, promoting cross-sectoral partnership and focusing on measurable social outcomes, the results of this study reveal a much more complex and ambivalent picture. These findings reinforce existing critiques in the social innovation literature, which emphasize the importance of addressing the technical design of policy instruments such as OBCs but also the broader institutional ecosystems in which they are deployed. Enabling social innovation through collaborative forms such as OBCs requires contractual reforms and cultural change, capacity building and new forms of collaborative governance that prioritize ethics, learning, inclusion and long-term social value creation.

From a policy and practical perspective, these findings highlight the need for national and local policymakers to go beyond the simple adoption of performance-based instruments. Concrete support measures are needed to build technical and managerial capacities within public administrations, promote shared learning platforms and strengthen inclusive governance mechanisms that balance power between public, private and third sector actors. Leveraging strategic policy windows, such as the PNRR in Italy, could provide the institutional impetus needed to advance these goals, especially if linked to dedicated outcome funds and robust impact measurement infrastructures aimed at fostering social innovation at scale.

However, the limitations of this study must also be considered, which also suggest the need for future studies. Another limitation concerns our participation in the project meetings, which, while providing longitudinal and in-depth insights, may also have introduced risks of confirmatory interpretation. Although we sought to mitigate these risks through triangulation of interviews, non-participants’ observations and documents, as well as reflective discussions within the team, the researchers’ interpretative approach may have influenced data interpretation.

In addition, the results are based on a single pilot experience and cannot be fully generalizable to other policy areas or national contexts. Future research should extend this analysis to other cases and countries, adopting comparative and longitudinal approaches to better understand the conditions under which OBCs can enable social innovation. Furthermore, exploring the perspectives of service users and beneficiaries remains a critical area for further research to ensure that innovation in public service delivery remains focused on the needs and experiences of those it aims to serve.