When did 'innovation' become insufficient?

Think about the history of innovation; ideas met the material world to make our lives better-- more efficiency, more effectiveness in our business life as well as our recreational lives. But today, our innovations don't point skyward, they point outward, and our new technological innovations help us diversify business more quickly, enabling social shifts. Just when did we stop looking upward towards a considerably better life and instead we look around at an innovation plateau of choices?

Of course, I am speaking broadly about the innovations focused on impacting the top-of-the-pyramid but it is important for us to know our history of innovation to determine some of these social impact metrics. This is spun off from the PR newswire article, Launch of Global Impact 50 Index Will Spur Increase in Investments with Social and Financial Return, and the Economist article, A Place in Society, from this weeks reading. There were some very critical comments about the overly complex financial innovations of our developed nations, my favorite being the opener from A Place in Society as Lord Turner said "...the financial industry had grown 'beyond its socially useful size'" An observation directly linked to the diminishing marginal returns from the growth of these industries. I believe too that the growth of certain sections of technological developments have a diminishing marginal return towards our innovation. Apple is struggling with this as we speak- years in development and almost no one is satisfied with the subtle differences from the iPhone 4s and the iPhone 5. Honestly, I don't need a fancy new iphone 5- I was quite pleased with my Nokia 2200 if it hadn't have fell in the pool I'd still have it. By that, I postulate that our innovation of diverse choices is not really bringing us the efficiency which the same innovation power and energy could bring to the bottom-of-the-pyramid.

But that is an entirely modern view on our plethora of phone choices. Back in the early years phone calls would take hours before you were even put through and cost an arm or a leg just to get service from the operator. This is a truly archaic experience which should not even be recreated by less developed countries-- that is where our differences in historical innovation, the historical rubber, don't meed the new roads of our current age. Back in the days of early telephones we required enormous amounts of infrastructure, demand and innovation on all dimensions of the adoption process. America's innovations on the ability to transform socially, adapt and adopt new technology is a cultural feat. In 1907 Maytag developed a quicker way to wash clothes and brought this to the market. These non-motorized washers started a hundred year old company of washing machines. Today we try to bring washing machines to the third world without electricity- similar to Maytag's old washing machines before electricity (short video attached). But the major difference is that the consumers of this product don't have the same relationship to the product and producer that early American's had. If we had a bicycle powered washer in early America- we were the top-of-the-pyramid. We were inspired by this innovation and companies competed to overcome each other. The social competition of that innovation brought the demand for a cycle of innovation. Today our Social Innovations follow a different model (Which is why we are talking so much about a different set of metrics) in which competitors don't do 'business battle' against their competitors but instead conduct 'cause battle' against immaterial goals of development. But the solution needs to be deeper and more material than a 'cause battle' and there needs to be demand from the consumers if we want to see innovation lead not only to adoption but to inspire communities to attempt to develop. If we can bring the tools and training for communities to develop their own innovations, I impose, that we will have a cycle of innovation. Now, this cycle might take fifty years to go from a crank washer to the machine washer just like it did for American's but that sort of innovation and those tools are how we originally made our lives better. We didn't have to define "social innovation" in those days because all of our innovations were made to improve people's lives. When did those products become so diverse that the only purchase value was the social signalling it brought? Our Apple fans want the newest gadget to show others and build social status, is this the definition of innovation for social signalling? Or was it in the 80's during the first Laser Disk tried to outplay the vinyl? Was it even earlier when automobiles forced horses and buggies off of the roads? When was the turning point that began a slow shift away from innovation for efficiency of time and effort?

Non-Profit v. For-Profit

A friend and I, who hope to become social venture partners, have been debating the relative merits of non-profit and for-profit organizational structures.  What opportunities does each form present?  What challenges does each form place in the path of our mission?

One of our primary social impact objectives is to employ individuals who cannot find employment elsewhere.  I argue that the profit motive underlying a for-profit business empowers a strong managerial approach that makes workforce development more effective.  The theme of “innovate or die,” “sustain yourself or die,” trickle down from the venture managers to the entry-level employee.  In addition to developing hard skills, effective workforce development must instill a sense of responsibility and accountability in its clients, to whom genuine opportunity is rarely presented and who have become desensitized to the potential return on initiative and perseverance.   What better way to model the values of accountability, responsibility and perseverance than to transparently present the P&L statement to each employee?  Our costs are $10,000.  If we (you and me together!) don’t find a way to earn $10,000, we are all out of a job.  Now certainly we need carrots to go along with this big stick, but the profit motive is a clear message that can cut through the many educational, cultural and social barriers that can stifle effective workforce training.  Perhaps this seems paternalistic or pedantic.  Perhaps I am underestimating the potential of “soft power” approaches like vision setting, charisma and mission-driven ventures.  But in three years of retail management, the profit motive resonated with my team members.  The more clearly we defined sales and productivity goals and tracked our progress towards them, the more we all pushed each other towards them. 

The entire preceding paragraph may apply to non-profits as well.  Certainly a non-profit can set sales and revenue targets.  Certainly a non-profit can hold its employees accountable.  However, when push comes to shove, the temptation of another grant, another funding source may derail an organization’s progress towards sustainability and ultimately, its impact.  That one additional grant also might preserve that one non-value adding employee or that one ineffective program.  In the context of workforce development, I believe a social venture that wants to train and develop workers from an economically, socially and culturally marginalized community harms its mission if it does not model the “real world.”  My first “real” summer jobs were with non-profits.  What a shock it was when I had transition to working at a grocery store.  If you cut my hourly wage in half, eliminated the peer pressure applied by my wife, parents and in-laws, I kid you not, I probably would have quit.  The customers were mean.  My boss was a jerk.  My work lacked fulfillment.  Maybe I’m lazy.  Or maybe I fallaciously extrapolated my non-profit employment experience and created a false expectation.  (Did anyone else want to run right back to college when you graduated into the real world?  Then you know what I’m talking about.)   The problem is that most jobs available to under-skilled worker are not ideal jobs.  Ventures that pursue a mission of workforce development must model the “real world” in some way.  I believe that the profit motive is an effective check against the (good!) impulses towards idealism and compassion that can easily exert hegemony over non-profit’s strategy.  

I realize this argument may strike some readers as paternalistic in nature.  I certainly make some strong assumptions about the background of “at-risk” or “under-skilled workers.”  I only make these assumptions because I think non-profit managers with master’s degrees can also be detrimentally swayed by a non-profit organization’s incentive scheme.  As a social entrepreneur, it is all too easy to settle for grants, charity and donations.  We may tell ourselves we will use them to create a sustainable organization, but that rarely happens.  What I’m trying to say is that my main rationale for arguing that “at-risk” employees need to feel the stick of the profit motive is the realization that I need to feel that stick.  

Other considerations in this debate include the tax implications of an organizational structure.  With all of the tax credits, loan guarantees and incentives for business to locate in under-served areas, the non-profit advantage in this domain is mitigated.  

The organizational structure also shapes growth opportunities.  The article “The Funding Gap” argued that for-profit oriented funding vehicles are often better optimized for rapid growth and thus more rapid and wide-reaching social impact.  

I’m curious to know how you would argue for a non-profit structure.  Also, what’s missing in this dichotomous debate that limits itself to either one or the other?  Does anyone have experience with hybrid organizations?  I found this article that presents an analysis of non-profits owning a franchised restaurant strictly for the purpose of revenue generation.  But it doesn’t explore the idea of a non-profit/for-profit hybrid in which both arms of the organization pursue social missions.

Measuring Social Impact With Conflicting Stakeholders

The readings about how to effectively assess social impact got me thinking about the best combination of talents to achieve desired outcomes, as priorities and ethics vary widely across stakeholders. Over the summer, I went to a Department of Education/USAID meeting about better collaboration and communication across their similar initiatives. I met a representative from an organization called The Partnering Initiative, which aims to strategically design effective collaboration amongst society, businesses, and the government. I read through some of their case studies and I found one called Conflicting Cultures that exemplifies this week’s theme of setting up a system that allows you to effectively manage and assess impact.

This case provides an account of an attempt at a partnership between a UN agency and a multinational company. While they agreed on the common interest of addressing child labor in an Asian country through improving primary education, they immediately encountered differences regarding their internal procedures. The UN and the company not only had different internal requirements for projects, but they made decisions differently and in different time frames. Aside from these internal communication issues, the actual country that they were hoping to positively impact was going through its own changes, causing more uncertainty and requiring more changes.  The differences between these organizations combined with the lack of flexibility on both of their parts caused the partnership to deteriorate.

I really liked Pim’s way of describing how to measure social value- “I personally think that a combination between clear objective criteria on the one hand and transparency about subjective opinions is a good way to 'measure' social value.” If the two different organizations not only defined their objectives but also articulated their personal subjective goals, then both parties have a clear view of each others’ willingness to contribute to the cause and what that means regarding how each organization is run.

Aside from discussing initial specific roles, I wonder what other tactics can prepare partnerships for evolution within the project. In many social ventures with multiple stakeholders, there is often the main driver of the innovation and the party that gains some sort of outside benefit from it. It is important to have an ‘intermediary’ who can bridge gaps and focus more on the future of the project as opposed to current circumstances. In Measuring Social Impact, Mulgan discusses effective supply and effective demand as an effective means to evaluate social value. It can be expected that situations, strategies, and scopes will change, so which organization should make more concessions- the supplier or the demander?

A Fix for Society?

As a disclaimer, I was previously completely unfamiliar with how impact investments actually work. Thus far I haven’t taken any classes in advanced economics or have analyzed economic policies, their agents, and how they help whom they are meant to serve. The Economist article was probably the most illuminating for me, because it kind of talked about the logic in making these investments, from an investor’s point of view. Since the readings seemed to all support impact investing and were arguably written for potential investors, I wasn’t really able to gain a full understanding of the consequences (if any) that might exist in these transactions.

            I have understood that impact investing, just like any other type of business deal in a capitalist society, is meant to complete the job for which a local, state, or even national government is ill equipped. To me it made sense that nonprofits are often unable to scale their projects in order to serve a broader amount of people, yet I did not understand how governments basically were supporting ineffective and costly social programs. While I’ve heard about such failure in public policy, I never really grasped how such failure was allowed to occur (and persist) – especially at the taxpayers’ expense.

            Nevertheless, I agree that impact investment is an innovative concept that connects worthy causes with funders that not only seek financial gain, but also wish to have a positive impact on society. To me, this is more favorable than investors doing business with companies that may not be adequately serving society and whose products directly contribute to either the death or prolonged suffering of others. Thus, besides the philosophical reasoning that supports impact investing, I am still somewhat confused about the actual transactions take place. I found that I had to look up the definitions to certain terms that were prevalent in the readings, and in effect probably missed the significance of their role in the process.

            From an ethical perspective, I did however come away from the readings with a better picture of why impact investing is beneficial. I suppose that, coming from a nonprofit background, seeing investors profiting from the success of social ventures was at first something I questioned greatly. After all, I never really thought about the grey area with supporting causes – since I am only a student and do not have the extra money to invest in such ventures myself. 

Does Bridging the funding gap mean proving your worth?

This week’s reading were both frustrating and encouraging for someone who wants to work for a social enterprise in order to get the best of both worlds and yet feel as though we have some control over the success of our future (growing the enterprise, scaling up the mission etc). On one hand, it is frustrating to hear what we already kind of know, but hate to admit - that social enterprises are often limited by the very same thing that makes them so exciting to be a part of. And yet, it is understandable that philanthropy doesn’t always extend to organizations that blur the lines between pure social mission and profit generation, especially when there are thousands of pure non-profits all aiming to do good work and make a difference. Similarly, it is understandable for commercial investors to be cautious of investing in organizations that are not clearly defined and many decisions could be considered subjective which goes against the mantra of smart investing. As a result, there is a funding gap.

The good news is that this issue is gaining ground and people see the benefits of social enterprise which means more people have turned their attention to how to address it and how to help. Impact investments based on assessments of organizations based on accepted indices seems to make a lot of sense. I like the idea of the hybrid organization- a structure that has two distinct but related organizations with closely related missions and overlapping operations. However, this only solves one half of the issue: So, you may have the attention of both sides of the funding issue but now you still have to prove yourself - how do you demonstrate that you are worth the investment? Enter impact assessments: let’s take the best of the best, launch the Global Impact 50 Index and essentially create a benchmark that can be used to evaluate validity. This definitely drew my attention, so I took a closer look at the Global Impact Investing Network (GIIN) and wanted to see how they plan to execute this. They have 4 great initiatives that work well together to give social enterprises a great place to start.
1.                    Investors' Council: an exclusive membership program that serves as a platform for leading, active impact investors to share experiences, learn about emerging sectors, explore opportunities for collaboration, and contribute to industry development, including impact metrics.
2.                    Impact Reporting and Investment Standards (IRIS): a set of metrics that can be used to describe an organization's social, environmental, and financial performance.
3.                    Impact Base: online, global directory of impact investment vehicles
4.                    Outreach: highlighted examples of impact investments, tracking industry progress, and sharing market information and best practices with the diverse impact investor community, potential impact investors, and the general public
 Of these initiatives, I am most excited about IRIS as it addresses issues that I have witnessed in the industry – the lack of transparency and clarity about goals in a social enterprise – why do we do what we do and how do we make it as meaningful to the people we share our story with as it is to us? I look forward to the refinement of the criteria for IRIS and its launch and hopefully eventual standardization of evaluation. http://www.thegiin.org/cgi-bin/iowa/home/index.htmlhttp://iris.thegiin.org/