To understand how we can address the needs of social innovators, we need to first understand the nature of the role they will play in spreading what works. Here at Root Cause, we believe that social innovation is the process of finding, testing, and honing potentially transformative ideas, practices, principles, and models of approaching social issues. Therefore, we need to first train social innovators to correctly assess and analyze social needs in order to enable their development of innovative approaches. Innovators, trained in social needs assessment and analysis, will be able to understand the complex nature of social problem solving, clearly articulate their vision of change and develop expertise on the social issue landscape.

This in turn will allow them to identify new opportunities for impact, define organizational roles, and develop innovative solutions with a focus on target beneficiaries. Finally, this capacity of social needs assessment will assist them in developing and articulating an approach and managing an organization to achieve its goals. But once these leaders have developed innovative approaches, how can we help them spread these models? In other words, how are we equipping them to advance social innovation?

Our work through the Social Innovation Forum shows that spreading proven approaches requires collaboration between nonprofits, philanthropy, government, and business as they move through the social innovation process. Thus, social innovators need to be trained in strategic collaboration, where they can Identify and develop key partnerships within and across social issues and sectors. These partnerships will facilitate the spread of innovative approaches via knowledge sharing about best practices and collaboration with similarly mission-aligned organizations.

However, this collaboration itself requires a platform like a social impact market. Therefore, effective social innovators understand how social impact markets operate. They can develop and implement a system to measure and communicate performance. Consequently, social innovators need to be trained to learn from performance, make data-driven decisions focused on continuous improvement, and effectively allocate resources based on performance.

If sustainable impact is a question of performance, leaders engaged in social impact need to measure their performance to maximize their social impact. This new generation of leaders will need to develop competencies in market assessment and analysis, building and sustaining organizations, engaging in outcomes-driven adaptive learning, and collaborating across sectors. Are our leaders ready for this? If not, how can we prepare them?

This past week, I explored how social impact markets can facilitate this role in a webinar hosted by Stanford Social Innovation Review based on my Winter 2012 article in the magazine. The webinar featured State Street Foundation’s Corporate Citizenship Vice President Sheila Cody Peterson representing the Youth Violence Prevention Funder Learning Collaborative, ACCESS CEO Bob Giannino- Racine speaking about his participation in Root Cause’s Social Innovation Forum, and Shawn Dove, the Campaign Manager for Open Society Foundations’ Campaign for Black Male Achievement. Through the conversation, it became even clearer to me that there are two ways in which a funder can be the key lever in ensuring the allocation of resources based on performance in a social impact market.

First, funders need to take the initiative to provide the infrastructure, information, and incentives required to direct resources toward performance. Created three years ago to align funding in youth violence prevention, State Street Foundation’s Youth Violence Prevention Funder Learning Collaborative stands as such an example of an emerging social impact market. Currently the collaborative consists of 45 private and 12 public funders, who are learning, sharing, and acting in a market-based approach. Yet the knowledge sharing goes beyond the collaborative since all the information is publicly accessible to any interested funder.

According to Sheila, one of the most important first steps was to identify strategy areas most in need of aligned funding based on research and on funders’ current giving priorities. The three areas—workforce development, youth development and mentoring, and family support and mental health—helped organize funders into working groups aligned around these strategy areas.

Within these working groups, funders learn about their area of focus, creating a common set of knowledge. They share funding expertise and learn to use this knowledge to align funding by developing funding tools, co investing, etc.

The funders invest in nonprofits based on shared views of prevention and by choosing outcome-driven practices they all agreed were necessary. Using the social impact market model, some funders in the YVP Funder Learning Collaborative have aligned $1.5 million in private investment, increasing meaningful employment experiences for over 900 youth in targeted communities where violence is highest.

Second, funders need to be willing to help programs build capacity to perform better and spread what’s working within the social impact market. Root Cause’s Social Innovation Forum played that role for ACCESS, a national nonprofit working towards removing the inability to afford college as a barrier to education. During the webinar ACCESS CEO Bob Giannino-Racine attributed the organization’s tremendous growth to the capacity-building support provided by SIF. Within the few years of working with SIF, ACCESS has gone from serving 2,734 students to serving 9,500, while securing $57.2 million in financial aid compared to $45 million before SIF. ACCESS went from an individual organization in need of support to piloting a training program in ten cities and expanding direct services in three others.

Shawn Dove, representing the Campaign for Black Male Achievement, reiterated this role of funders while discussing the work required to improve the lives of black men and boys. As an example, with 42 percent of all black boys failing an entire grade at least once, black male achievement is a challenge in need of a social impact market. He noted that there are thousands of programs working in communities across the country that are having results; however, there is currently no social impact market structure to organize the efforts, incentivize performance, and spread the impact.

Therefore, the challenge lies in the process of getting funders to take these two bold steps: data-aligned funding and provision of capacity building support so organizations can strengthen performance to improve lives. A striking example Shawn brought up was that there are currently many foundations that ask for performance data in their grant proposals, while very few of these actually give grants for measuring performance and evaluation. Sheila added that since not all nonprofit partners can provide outcome information in a cost-effective manner, the initial selection of performance indicators should be based on feasible and currently available indicators. The funders should talk to content experts to understand what indicators these nonprofits can feasibly measure while simultaneously supporting nonprofits to build capacity to evaluate their own impact.

All in all, the conversation brought to light the need to emphasize the role of funders in directing the flow of resources in a social impact market. The market approach pushes beyond collaboration as it allows a clearer way to allocate limited resources. As Sheila stated, funders need to move away from loose collaboration with individual areas of focus and a lack of sharing practices and knowledge toward strategic alignment that incentivizes performance and builds capacity.

According to the RFR, Massachusetts will be exploring Pay for Success contracts in two social issues: chronic homelessness and juvenile justice. This statement represents a welcome shift in the way we approach social impact in two significant ways. First, it orients service providers towards understanding that in a particular social issue, it is a type of program model based on best practices that drives real change, not an individual organization. Second, focusing on common issues will allow the agreement between government and nonprofits working in that social issue area to use common indicators and common terminology related to outcomes. We at Root Cause, call this information alignment because focusing on an approach that works starts to align the terminology of all groups striving towards outcomes in that area. If we do not start calling the social issues by the same name – and realize that not individual organizations, but rather programs based on best practices produce a measureable outcome, how will we ever agree on what high performance is?  We were also pleased to see chronic homelessness selected in the RFR, as it is one of the eight social issue reports we have produced. It is also an area where we believe there is a great deal of evidence of what approach works effectively.

Another aspect of the RFR I really liked was that it does not assume a need for intermediaries to implement Pay for Success contracts. Instead it looks to intermediaries as a potential supplementary to support the initial Pay for Success contracts model if needed.  While I applaud the efforts of Social Finance, and am incredibly impressed by their laser focus on making sure this idea is successful, it is good to see an alternative experiment where government and nonprofit programs try to negotiate the terms of agreements without an intermediary. A huge concern in using the Social Impact Bond model was that it involved large levels of additional resources to even set up the payment structure. Thus, the absence of an intermediary might help the model be more scalable in an already resource-strapped environment.

Thus, with the RFR milestone comes a larger hill that we still have to climb: reallocating current government funds to social programs engaging in the pay for success model, without raising additional money from outside sources in a time of austerity. It will not be easy to renegotiate the terms of the billions of dollars being spent currently and to reallocate this money to programs in chronic homelessness and juvenile justice that engage in new Pay for Success contracts. However, if we are truly going to make progress, we need to head towards a performance-based allocation of resources. The announcement this past week is a step in the right direction. I am hoping we will now see more experiments that don’t just rely on increasing philanthropy, but instead focus on the assessment of how current government funds are being allocated to programs across different social issues.

Illustration: Shannon May

A Social Impact Bond or a Pay-for-Success bond is an investment model where the government enters into a contracting position with an intermediary that raises private funds to finance the operations of nonprofits driving social impact. It is at this intersection where performance measurement becomes relevant. The government will pay the investment back with returns ONLY if the nonprofit in question delivers the pre-defined objectives (as judged by an independent evaluator). Therefore the government’s biggest incentives in engaging in this model are the limited liability it takes on and the fact that no tax dollars are wasted on programs that don’t generate government savings. Thus, the government is accelerating the adoption of new approaches while shifting the burden of risk on to private investors. As Jeff mentioned in the panel, this system also builds “evaluation into the DNA” of the government because funding can now be directed to those organizations that have proven to be successful.

On the other hand, philanthropy through SIBs is taking the form of a private sector instrument because these bonds are now seen as investments, with a tax treatment that is no longer under charitable contribution. In this model it is private philanthropists who are the investors providing funds to finance the operations of collaborating nonprofits and who can expect to see real capital gain or loss depending on the performance of the nonprofit. What do these returns look like? According to Tracy, although it’s too early in the US model to be able to throw out a concrete number, the UK recidivism model saw returns in the range of 2 – 13% net IRR after recidivism was lowered to a certain pre-defined threshold. As expected, the investors were mostly philanthropically motivated private foundations using a portfolio outside its grant-making corpus.

In simplest terms, the SIB or “pay for success” model rewards proven innovations while simultaneously allowing investors to get more social impact out of every dollar. However, the discussion raised a few clarifying questions and potential caveats about the implementation of this model. For example, what kind of nonprofit organizations are suitable to use this tool and what challenges will they face? Additionally, given how much resources will be required for the implementation is this the best way to utilize our already limited resources?

In talking to Jeff and Tracy about how SIBs will impact nonprofits, I understood that the organization ideal to work within this model will have an organizational structure with proven success, experience with measuring impact and the ability to scale. However more importantly, the SIB model would require not one single nonprofit but rather a network of nonprofits providing a multitude services.  For example in the UK SIB model working to reduce recidivism, there was a team of NGOs providing a range of services starting from finding jobs for the prisoners to working with their families. The objective is not to provide one service better but to stabilize lives, which in turn requires collaboration.  Therefore, this is not an easy model to pilot, let alone scale.

Additionally, Jeff noted that SIBs are not ideal for services with a high cost-benefit ratio. This model is not the right way to fund a majority of social services and is instead more suitable for services where the benefit-cost ratio is 2 and that deliver a high return on investments while having outcomes that are measurable. Finally, these programs should also be supplementary to a larger program or have safeguards against failure so that there would be no huge impact if the program fails.

The SIB model presents certain challenges to nonprofits themselves. Lisa from My Life My Choice raised the question of validity in impact assessment and performance measurement. With the amount of ambiguity shrouding the progress in social impact, who decides which results are valid and what do good outcomes look like for organizations like MLMC? Furthermore, since the effectiveness of the SIB model depends on the amount of government savings the proven nonprofit can generate, there needs to be better definition as to how existing efficiencies are being recaptured. Using the example of Medicaid, Joe Finn from the Massachusetts Housing and Shelter Alliance asked when a program is proven to have created certain efficiencies, how willing were people going to be to provide a financial return to philanthropic investors and how much?

Another growing concern among nonprofits is whether the SIB would cannibalize current grant making activities and further limit the already scarce resources available and where does the idea of reduced risk becomes reduced responsibility on the part of the government? Tracy responded by saying that both foundations and individuals are looking at SIBs as investments. Positive returns on SIBs will constitute long-term capital gain and is a different tax treatment from a charitable deduction. Hence, SIBs are no longer a segment of philanthropy and belong to a different source of money. In fact from the evidence gathered from the UK model, it seems that foundations have been leveraging a pool of money that is outside the grant portfolio; thus introducing a new pathway for NGOs to access capital to fund and scale their work while generating future recoverable government savings.

Given all this, I wondered whether this was a good allocation of resources to get government in a better contracting position with nonprofits? The answer, so far, is yes – because the incentives are in the right places. Firstly, it provides an incentive to government to allocate social service dollars through performance measurement checks with minimal risk. Secondly, it creates an incentive for organizations to measure outcomes because in a few years there will be evidence that program evaluation can in fact attract significant funding.  Lastly, it creates an incentive for private investors to allocate their resources and now receive a nominal return.

SIB’s are creating conversations between government and nonprofits that in the past have been difficult to get going.  Despite the uphill battle to get SIB’s off the ground, this tool has many positive implications beyond just the goal of doing more with less.

Illustration: Shannon May

To start, there was the Obama Administration’s commitment forging a new role for government, which was evident in her words.  As Ms. Obama put it at one point: “With a little nudge from government and a lot of private investment, we can create a powerful new model for making change in our communities.”  This is the vision that many of us, including Root Cause through its Public Innovators initiative, have been working to realize in recent years.  We are finding a middle path between the two ideologies that have dominated political rhetoric over the past several decades: that of the FDR-styled ‘government-as-service-provider’ on the one-hand and the Reagan-inspired ‘government-is-the-problem’ on the other.  That new way of operating – in which government plays a role in orchestrating cross-sector approaches to creating social impact – is still taking shape.  But initiatives like the Social Innovation Fund are providing hopeful glimpses of what it will look like.

In addition, yesterday’s event helped to reveal a new path forward for another key stakeholder in the future of social problem solving: our nation’s foundations. Ms. Obama’s remarks called attention to two important and complementary roles that government and foundations can play by partnering together.  While government can help to facilitate collaboration from the top down, foundations can help ensure that the ideas we encourage and ultimately spread come from our local communities. Deeply entrenched in the communities in which they operate, foundations already know the needs and some of the best solutions to addressing them.  By recognizing the need to direct resources based on results and fostering the continual creation of new ideas in their communities, foundations can play an essential role in bringing about healthy social impact market that fosters innovation and directs resources for solving social problems based on performance.

It was clear yesterday that a new generation of leaders at our nation’s foundations is poised to meet this challenge. A letter of support submitted immediately after the First Lady’s remarks by the Council on Foundations on behalf of many of our country’s community foundations impressively summarized the opportunity: “We know that to make progress on our challenges, we need to find and support the best, most promising ideas and enlist all parts of our communities in implementing these solutions. We also know that with the right resources, the right partnerships, and the right collaborations, we can develop new solutions that can be replicated and moved to other communities to address their needs.”

Yesterday’s event at the White House, I believe, brought us one step closer on our journey toward a more effective, twenty-first century approach to today’s social challenges. We are beginning to speak the same language about finding and spreading solutions and making investments based on results.  We are beginning to see the variety of roles that need to be played in order to align and amplify existing efforts to solve social problems. Of course, the road ahead is still long, but yesterday left me feeling hopeful and energized for what will come next.

Landrieu’s job will not be an easy one, to say the least. As we approach the five-year anniversary of Hurricane Katrina, New Orleans still faces many of the challenges that the destruction of the city exposed and exacerbated. Add to that the burden of our nation’s current economic situation, and New Orleans appears as a microcosm of the United States and the issues we are currently confronting. When Landrieu walks into New Orleans City Hall, he will encounter, on the city level, a similar situation to that which President Obama found when he took office.

There are a number of reasons to be hopeful about what Landrieu can do. First, the overwhelming victory of the first white mayor in 30 years in a city where 67% of the population is black suggests that New Orleans is moving past the racial divisions that it has experienced in recent decades. Landrieu and the city’s population appear eager to work with leaders representing all backgrounds and colors to build a better New Orleans.

Additionally, the election of Landrieu provides an important opportunity to see up close how forward-thinking government leaders throughout the United States are taking on new roles in order to move the bar on our most pressing challenges in economic development; education; the environment; health and health care; and youth, family, and elderly issues. Landrieu represents this new breed of government leader who is taking bold steps to identify and help to spread the most effective, efficient, and sustainable solutions to social problems. Through the Office of Social Entrepreneurship that he founded while serving as the state’s Lieutenant Governor, Landrieu has demonstrated a commitment to ensuring that government resources for solving social problems go to organizations with proven results, facilitating public-private partnerships that maximize resources for addressing social problems, and creating a policy environment that encourages social innovation. Last April, we awarded the then Lieutenant Governor the first Root Cause Public Innovator Award precisely for this new style of leadership and his practical approach to the state’s social problems.

Now, as New Orleans enters a new chapter in its efforts to rebuild after Katrina, it is time for the nation to re-engage with New Orleans as well. With its new mayor, New Orleans is poised to provide us with a great American story of a city that pulled itself out of a state of dismay and distress to become a shining example of American social innovation. And that story will include many crucial lessons for other American cities as well.

This Saturday’s election in New Orleans features the latest in a string of campaigns in which a candidate’s core messages include social innovation or civic engagement. Lt. Gov. Landrieu, for whom this is a third attempt at New Orleans’ top spot, established Louisiana’s Office of Social Entrepreneurship – the first such office in the nation. When Hurricanes Katrina and Rita struck, they revealed the existence of successful approaches that that people of Louisiana had already been testing, as well as a need to bring successful models from elsewhere to fill in gaps. The lieutenant governor realized, however, that there was currently no good way for the government to facilitate the efficient spread of these ideas, efforts, and resources. Having the foresight to see that government could play a major role in effectively channeling these efforts and giving social entrepreneurs the skills they needed to give their ideas the best chance at having significant impact, the lieutenant governor founded the Office – and it has served as an example to many similar efforts around the country as more and more officials realize their own potential to facilitate the spread of enduring social impact. To learn more about the lt. governor’s social innovation agenda in Louisiana, you can watch him speak about the work at an event at the Aspen Institute and listen to a discussion between the two of us at the 2009 Social Enterprise Summit.

But Mitch Landrieu is not the only one who has put social innovation front and center. Paul Thissen, a state representative who is running for governor of Minnesota, has just introduced legislation that supports “innovation and multi-sector collaboration,” potentially opening new doors for cross-sector partnerships to accelerate social problem solving in that state. Alan Khazei, who ran for the senate seat left vacant by the death of Senator Ted Kennedy in Massachusetts, ran on the platform of “Big Citizenship” and was significantly buoyed by supporters of his work at City Year and the example it has set for national service. And Virginia Congressman Tom Perriello has been recognized for his focus on social entrepreneurship and lists “service” squarely on his Issues and Legislation page.

I’ve been excited to notice that this message is being repeated more and more frequently as many of us work together to spread a social innovation agenda across sectors and social issues. Candidates are beginning to use it as a differentiating message that has the potential to cut through the clutter and win elections because they know that citizens are disillusioned by the gridlock and stagnation they are used to seeing at all levels of government. As candidates search for ways to resonate with voters that are practical and solution-oriented, they increasingly see social innovation as part of that story.

I wanted to share some quick observations, and will offer more thoughts in the near future. My initial reactions:

1. The Corporation and the White House Office of Social Innovation and Civic Participation did an incredible job gathering viewpoints from so many different people and perspectives. It is clear that a great deal of thought was put into this document.
2. The awards are stated to be “in the approximate amounts of $5 million to $10 million to approximately five to seven intermediary organizations.” Because of the size of the awards, the one to one cash match, and the limited number of recipients, fewer organizations will be eligible to apply to the Fund than many had hoped for. While this may be a disappointment to some, it does show a commitment to demonstrating to Congress and the country that success the first time out of the gate is a priority (and is more likely given the limited number of awards) − and in the long run, hopefully this will allow for growth of this and similar programs in the future. This was, I am sure, a tough decision, but in the end seems like the right one.
3. Lastly, it appears that the Fund will promote a very thoughtful, rigorous, and most importantly, innovative approach to government investment in promising nonprofit solutions that will serve as an excellent resource for other government agencies to learn from. This is, I believe, one of the most important aspects of the Fund as we look to it to catalyze and spread this kind of thinking throughout city, state and federal levels of government.

Please note, the public comment period closes on January 15th!

We hosted the event because we wanted to broaden the conversation and educate people in the federal government about the importance of social innovation. We were fortunate to have an exciting group of attendees, including the recently appointed head of the Corporation for National and Community Service, Patrick Corvington, Mike Firestone from Senator Jeanne Shaheen’s office, Jim Fruchterman from Benetech, and Bill Strathman from Network for Good.

We opened the morning with a welcome from Virginia Congressman Jim Moran and an introduction from myself, and then heard from a panel of social innovators followed by a panel of government leaders. You can listen to audio from the event by clicking on the session links below:

Session 1:

My introduction (click here to read my remarks)

Opening Remarks from Virginia Congressman Jim Moran

Social Innovators Panel: Keith Artin, the COO of TROSA; Marcia Kerz, president of OASIS; Ellen Lawton, executive director of the National Center for Medical-Legal Partnership; and Terri Steingrebe, Bonnie CLAC’s CEO, discussed the critical role that government can play in furthering their work, the barriers they face, and what government can do to accelerate their impact.

Session 2:

Government Leaders Panel: Chris Campbell, Sen. Hatch’s legislative director; Judy Reese Morse, Louisiana Lt. Governor Landrieu’s chief of staff; Peter Frosch, Rep. McCollum’s legislative director; Brian Van Hook, the senior policy advisor to the Senate Small Business Committee/Sen. Landrieu’s office; Marta Urquilla, the Senior Advisor for Social Innovation from the Corporation for National and Community Service; and Shivam Mallick-Shah, the Director of Special Initiatives for the Office of Innovation & Improvement at the Department of Education, gave their perspectives from Congress, federal agencies, and at the state level on what must be done to accelerate social innovation with government’s support.

For me, there were a couple of really critical takeaways from the event:

• We have to find a way to turn the conversation from the few to the many. Although this work is getting a lot of attention right now, the reality is that only a few members of Congress and government agencies at the city, state and federal levels are championing this work. We must convince people from agencies and in elected offices that this work is important.
• We need to clarify exactly what we’re working toward: the better mousetrap. We have to work hard not to get caught up in our own jargon, and to simplify the message about how what’s different here could make real change. When we lead off with “social innovation,” it often falls on deaf ears. How do we refocus and emphasize that this is about social needs and addressing problems in a different way, and communicate that we are really talking about improving people’s lives?

I especially encourage you to listen to the panel featuring government leaders. I believe it is the first time that representatives from Congress, government agencies, and a state have come together to share their viewpoints about social innovation. They each had very different perspectives on both why and what needs to be done to continue the work, and I know I learned a lot from the conversation. I hope you will too.

You can also see clips from the panels and video interviews with various attendees on Root Cause’s YouTube channel.

Photo by banna123456 via flickr

UPDATE: Watch the video of the live conversation here.

Read my keynote speech here.

Photo by sylvester75117 via flickr