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Measuring Social Impact

Impact Market Failure

It comes down to this: We’re all operating in a dysfunctional market for impact.

I was dragging my feet on the way to the Skoll Forum in Oxford. I’d been in Africa for a month, connecting with 20 organizations in 4 countries in 4 weeks, and I was pretty desperate to get home and sleep in a room I didn’t have to check out of.

I’m really glad I went, though. Among other things, the organizers did a beautiful job of bringing serious funders together in a productive way. Those who came seemed like a different breed of donors, in a different kind of mood. There is a high ratio of doers to donors at Skoll, which may explain why the donors there seemed less afraid of hanging out with doers and more serious about funding them.

As for doers, the Skoll social entrepreneurs are the kind of people who make you feel optimistic about the fate of the world, and it’s nice to see them celebrated. All the hoopla makes it that much weirder when you talk to them and find that almost all are in a continual scramble for money. Two of the organizations who’ve demonstrated big bang for the buck are in precarious financial straits and no one’s financial future is assured, no matter how well they perform.

That’s just wrong. For god’s sake, these are the rock stars, the golden ones anointed by Jeff Skoll and blessed by Archbishop Tutu. They’re not the only great ones out there, but they’re all pretty remarkable. We’ve been making a big deal out of social entrepreneurship for a decade, but even the most celebrated are still reduced to passing a tin cup. What gives?

It comes down to this: We’re all operating in a dysfunctional market for impact.

Think about it. In the for-profit world, if you make a big profit, everyone wants a piece of you. If you have a money-making idea, you need to protect it from me, or I’ll steal it. With a few hiccups here and there, capital flows toward success.

That doesn’t happen in the social sector. Real impact—our analog of profit—doesn’t make it easier to fund-raise. Good ideas sit around unused (a friend of mine referred to the social sector as “a desolate landscape of abandoned pilots”), and zombie NGO’s can operate for years without any evidence that real impact ensues. Capital does not flow efficiently toward those who know how to create change.

Ultimately, the fault lies with us, the donors. By and large, we don’t fund on the basis of impact—we’re like investors who don’t look at profit-and-loss sheets. Because we don’t demand ongoing measurement of impact, organizations don’t do it. Because we prefer to fund shiny new stuff, organizations have little incentive to copy others’ successes. Good ideas languish, and high-impact organizations struggle to raise the money they need to grow. Calls for collaboration go unheeded because organizations won’t get credit for the increased impact, and it may even hurt fund-raising.

As far as I know, no foundation head—or even program officer—has ever been fired explicitly for lack of impact. Wouldn’t it be great if a few of us who head up foundations got the chop for insufficient impact? How cool would it be if organizations without demonstrable impact went out of business, if high impact translated into higher compensation, if successful founders could move on with enough dough to start something new or sit on the beach for a while? 

There are encouraging signs out there. More donors are asking for measurement of impact and a lot of smart people are working on ways to measure it. I worry that they’re going to make it too complicated—at our little shop, we rely on a relatively simple eight-word-mission and single-best-indicator approach, and we prefer internalized systems where ongoing measurement feeds back into operations.

However we do it, though, it has to happen, and we have to fund on the basis of what emerges from the process. And in the end, I ought to get fired if I can’t show that our investments have led to real, scalable impact.

There, I’ve said it. Hold me to it.

Read more stories by Kevin Starr.

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COMMENTS

  • BY James Schmeling

    ON April 7, 2011 06:30 PM

    Great post. I think that it also goes to funding general operations of those with greatest impact, and not just a shiny project, new or not. Often these NGOs know what is needed in the field they hold expertise in, and they could do high-impact work, replicating and customizing the demos done by others or their own. Same with government funding for demonstration projects which then never make it into policy change even when they prove successful. And, if funders looked at other innovations which could be useful across the portfolio of funding they provide (e.g., http://www.ssireview.org/articles/entry/disseminating_orphan_innovations/), they might help spread impact as well.

  • Sean Stannard-Stockton's avatar

    BY Sean Stannard-Stockton

    ON April 8, 2011 08:42 AM

    Firing someone for not performing? Kevin, you radical!

  • BY Dan Viederman

    ON April 8, 2011 12:38 PM

    having spent two days prior to the Forum with Skoll Awardees as an ‘insider’ awardee, i had the same reaction as Kevin.  The Skoll-supported organizations are run by the most incredible people, who have demonstrated the effectiveness of innovation, and who deliver impact daily in the most dire circumstances. Yet we are still forced to bend ideas to meet foundation criteria, soft-pedal the real impact because it might make a corporate sponsor uncomfortable, change the way we talk about our work lest it eliminate opportunities, pretend everything we do is new ‘cause funders want to support the newest thing. One of the liveliest of our bunch even offered to become meek and quiet if it would lead to more funding.

    Kevin’s presentation at the SWF is worth watching on the web - i’m hopeful that his inspiring call for clarity will be heard widely.

  • BY Sandra Lund Diaz

    ON April 9, 2011 02:00 PM

    Serious funders and philanthropic individuals should take the time to learn about high-impact philanthropy. Reading Dr. Starr´s piece - http://www.mulagofoundation.org/sites/default/files/High_impact_philanthropy_9.0.pdf - is a good place to begin contemplating how both small foundations and large ones can have an impact and make a difference in the success of social entrepreneurship by contributing a wide range of resources at their disposal. At Knowledge Building in Action, http://www.kbinaction.com we lo,ok for ways to engage funders not just with their money but with their expertise, their knowledge, their networks and their commitment to the cause of improving educational outcomes and preparing students with 21st Century skills. Effective funders leverage their grant monies with these other resources as the most comprehensive support possible to the efforts of those on the front lines fighting societal ills and making this world a better place for millions of underserved.

  • Galen Townson's avatar

    BY Galen Townson

    ON April 10, 2011 01:01 AM

    Is this a question of marketing, where the very source of need arising from imperfect information and market failure is met by solutions which also fail to market properly, particularly mindful of the relatively small pool of stakeholders and investors with specific value-driven preferences?

    As with mainstream business where good or even great ideas and business models are either not enough or need adequate value chain and market positioning, so too social innovation and enterprise need to ensure adequate marketing.

    Does it then become doing good and doing well, with marketing and re/positioning well implicit to sustainable success?

  • BY Steven Pallesen

    ON April 10, 2011 05:47 PM

    Raising the standard is the abundant direction complimenting human design for self-government. The bottom line standard is scarcity cohersing governance of the masses. It really isn’t change we are after, it is simply self-discovery.

  • BY Tim Whitley

    ON April 12, 2011 01:30 PM

    What a post!  Thanks Kevin!  It’s disheartening to hear about the “desolate landscape of abandoned pilots,” especially when, after a year and a half, I’m still putting a pilot together and it feels like the wheels are coming off of the freakin’ car.  Great progress, and at a quickening pace, but by definition entrepreneurs are going against the status quo, doing something that hasn’t been done before, and that too often requires painstakingly-slow learning by doing, mistakes, and corrections.  As a nonprofit, we can’t offer equity or attract other resources via investment capital, so we must bootstrap our way to proof-of-concept in hopes that’ll attract angel philanthropy.  Absent that, or the even more elusive feat of bootstrapping to self sufficiency from earned income, drawing in the necessary people and resources before time runs out is tough.  The raw reality is that any startup has a finite amount of time and runway to pull things off.  Had I known all this before pursuing Cotap, I’d like to think I would have 100% done it again anyway, but that would be a lie.  It’s more around 95%  : ’ D

  • BY Anshula Chowdhury

    ON April 12, 2011 10:39 PM

    Kevin, I have two comments:

    1) Many people argue that at its height, impact investing will be its own asset class. I argue that at its height, all investment will be impact focused. This is because consumers are starting to buy based on social value (Here’s one example of market research that backs this: http://www.coneinc.com/files/2010-Cone-Cause-Evolution-Study.pdf). Therefore, social value creation will be a driver of financial profit creation.

    To be clear, what we are seeing is not a new asset class, but a market evolution.

    2) In this context, the “market failure” is not impact investing as an asset class, but as a global economy suffering from “sticky” prices. We, as aggregate consumers, still base our price perceptions on the economic value of goods and services. This aggregate behaviour will, I believe, eventually shift so that price perceptions are based on economic value+social value. I’ve argued this point in a couple of places, including on SocialFinance.ca: http://socialfinance.ca/blog/post/whats-wrong-with-social-metrics

    In the meantime, let’s hang in there and figure out how to optimize and communicate our social value creation.

  • BY Neha Misra

    ON April 13, 2011 10:48 AM

    Absolutely agree with you Kevin. There is a need for putting “Impact” on top of the foundation’s own performance evaluation as well as for the wide spectrum of NGO’s and social enterprises out there. I have seen many big and small NGO’s run by well meaning individuals ( in North and South ) who after a point forget what and why they are working for - the IMPACT. Somewhere down the line..the means ( money) becomes the end with running after one funding cycle to another while forgetting how effectively the human capital and financial capital is deployed towards achieving the real world impact. There should be an impact meter of some kind of social enterprises to separate the real rock stars from the reality tv stars ( perhaps something which adds charity navigator style broad organizational efficiency to program cost-benefit analysis ). It is happening to some extent like you say. We all need to do more of it in a more effective manner - not as an afterthought but as regular business protocol.

  • Lauren Burnhill's avatar

    BY Lauren Burnhill

    ON April 19, 2011 03:44 PM

    Kevin,

    Great post, which sadly echoes what I have found to be true with many leading social entrepreneurship organizations (great entrepreneurs that can’t find next stage funding). The dysfunctionality of the impact investment marketplace can’t be laid entirely at the feet of donors, however. At least notionally, a brave new world of commercially-oriented impact investors is meant to bridge the gap between non-profit social innovation and mainstream investment. Hybrid structures (L3C, b-corp) are attempts to create convergence between the non-profit and for-profit worlds in the hopes that new types of investors will fund sustainable social change. While I think hybrid structures are a great idea, pasting an “impact investment” label onto a hybrid is not the same as creating a social impact investment manager with the ability to evaluate and engage with ventures that create social value. While I see a growing range of organizations that look to support social entrepreneurs on the one hand, and a similarly expanding universe of networks and associations that seek to educate and advise potential social investors, no one seems too worried about who is minding the money in the middle!  Shouldn’t those who make impact investments be as “investment ready” as they’d like their portfolio companies to be?

    Arguably, the business model for social impact financial intermediation, which relies heavily on the creation of new stand-alone funds, each starting from scratch to develop policies, processes and systems, is inefficient at best and an obstacle to industry development at worst.  The first commercial microfinance fund, ProFund, was launched in 1994. By 2009, there were more than 80 commercial microfinance funds, but less than a dozen microfinance asset managers overseeing multiple funds and products. New intermediation structures and strategies are needed - ones that recognize the scarcity of experienced human capital (few multiple bottom line investors with significant track records, a limited number of firms in which next generation impact investment managers can gain experience, compensation structures that inhibit investing in talent), the need to approach impact measurement in ways that are both rigorous and creative and the critical importance of deep engagement with portfolio companies, especially in the area of governance.

    Might it not be more cost-effective and efficient to create 10 new social impact asset management firms with the capacity to structure and manage multiple investment instruments than to create 100 new investment funds each of which needs to recreate the wheel? The answer I get to this question is “Yes, that makes sense, but it’s not how things are done”. Innovation is just as important for investment intermediaries as it is for social entrepreneurs. If we always do what we’ve always done, stands to reason that we’ll get the same results we’ve always gotten.

  • BY Christian Flores-Carignan

    ON April 23, 2011 10:32 PM

    Funny you argue this, Kevin, since the buzzword I’m always hearing is “impact”. Moreover, there are several organizations out there promoting this, such as Grantmakers for Effective Philanthropy and the Center for Effective Philanthropy. I see the growth of metrics as inevitable, which will likely have both positive and negative consequences. Hopefully the common bureaucratic problems won’t undermine the aim of the metrics. We certainly don’t want the equivalent of “teaching to the test” to develop in the social sector.

    I wonder, if there are so many worthy social enterprises in need, from which organizations should the funds be taken? And what services will cease in consequence?

  • BY Christian Flores-Carignan

    ON April 24, 2011 08:45 PM

    It turns out the the World Banks recently launched a blog on development impact: http://blogs.worldbank.org/impactevaluations/node/506

  • BY Christian Flores-Carignan

    ON April 24, 2011 08:46 PM

    World Bank*

  • BY Jeff Mowatt

    ON April 25, 2011 05:14 AM

    There’s an earlier example of this undermining us in the Oxford Social Enterprise Forum of 2009 where ‘top names’ were presented as leaders in a new form of capitalism. It was partially sponsored from Uk government backed funds, I understand.

    As I’ve pointed out before, the Skoll social enterprise API is based on those they’ve awarded funding. This isn’t uncommon in other foundation based organisations who promote their own brand.

    The knock on effect for us in being marginalised is subsequently to be hijacked. So when it came to being asked recently to provide a social report, I included what had come about as a consequence irrespective of who took ownership  

    http://socialbusiness.socialgo.com/magazine/read/people-centered-economic-development—social-impact-report—-march-2011_25.html

  • Couldn’t agree more Kevin -  measuring “impact” is the first just the first stage though we also need some government / international support in converting “impact” to a real economic measure such that it registers clearly in supposed triple bottom line reporting that companies and governments are supposed to be heading toward.

    Economics after all is not just about money but about the efficient allocation of resources - something we will never have until we learn to properly define ‘efficient’.

  • Tom Hyland's avatar

    BY Tom Hyland

    ON April 26, 2011 07:21 AM

    Do you really think the market is dysfunctional or is it a matter of the market rejecting half-baked and narcissistic ideas? From what I can see, “social entrepreneurship” has become code for putting personal glory and Western guilt ahead of viable and well thought out solutions that work on the ground.
    It’s convenient to forget that it’s capitalism and capitalism alone that has helped lift hundreds of millions out of extreme poverty.  Until those who brand themselves “social entrepreneurs” quit making excuses and find real and viable market based solutions to address large-scale societal woes the shakeout will continue. We don’t need alternate legal structures, hybrid companies, or more assessment; rather, we need to recognize that the $50-70 trillion dollars in the world’s capital markets is the only way to begin to make a dent - until we do we’ll keep spinning our wheels and generating more hot air.

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