Business Design for Social Good
How to create, measure and improve impact? — A Business Design review of “Lean Impact” by Ann Mei Chang
Many strive to do meaningful work that does not only provide you a living but also has a positive impact on the people and the planet. Recently CEOs of leading US companies stated the need for a purpose beyond profit and the Economist dedicated a whole issue to the topic. Personally, I have written about Business Design and sustainability before and our focus at United Peers is on impact ventures.
I recently read Lean Impact by Ann Mei Chang and added it to my booklist. Following, I wrote a short review (for the more audiovisual of you I also found this video of her).
Business Design and Impact
Chang knows both worlds from 20 years of working in tech companies and serving as Chief Innovation Officer of USAID — the American development agency. For a Business Designer her work is a great introduction to the world of impact and social good as it uses the language of Lean Startup and puts it in a non-profit context. I skip the first half of the book as it introduces well known Lean Startup concepts: focus on the problem, identify assumptions and test them with experiments.
Value & Growth —Scale Without Customers
The Venn diagram below shows what Lean Impact is about: value, growth, and impact. Value and growth are well known concepts to a Business Designer but they come with a twist in combination to impact.
Value is generated for the beneficiary of a project and in most cases they are different from the paying customer.
The engines of growth differ significantly from for-profit businesses:
- Market driven organisations run a profitable business but keep the triple bottom line in mind.
- Cross-subsidy creates a profitable line of business that supports the non-profit work
- Voluntary contributions by the beneficiaies are similar to the pay-as-much-as-you-want model of for-profit businesses.
- Replication & commiditization include giving up control and distribute (cost-lowering) knowledge to other players
- Government may fund social businesses if they are compatible with its goals or adopt their solution once it has been proven effective.
- Big donors provide limited funds for well-scaling solutions.
Impact — Experiments for Effectiveness
Impact is the concept probably newest to Business Designers as it is specific to non-profit businesses. It describes the desired change in society or environment that you want to achieve with your actions. The biggest challenge is to measure impact in order to prioritize activities and allocate funds. Actually, with a lot of interventions their effectiveness is not clear. Chang gives the example of microcredits and their impact that is controversially viewed.
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Therefore, non-profits are encouraged to develop a theory of change (consisting of the five stages inputs, activities, outputs, outcomes, impact) with measurable KPIs to track their progress. Thereby, relationships between early indicators and intangible outcomes are proposed.
Chang suggests the implementation of impact MVPs to test hypotheses about the chain of effects along the way. Analogous to Lean Startup the riskiest links are identified and tested early on. By this constant experimentation social businesses find the most effective way to create impact with starting small and scaling afterwards.
But this approach conflicts with the current setup of upfront funding for non-profits.
Funding —Challenges for Social Innovation
The last part of the book addresses the major issue of funding and suggests innovative ways of funding — borrowed from the startup world. According to Chang “the structure and availability of funding is by far the greatest barrier to social innovation”. Every funder has their own agenda and goals and often tangible results are more important for follow-up funding than long term impacts. Fundraising therefore becomes a tiring task for social business founders even more than for for-profit startups because there are not such clear metrics as revenue and profit.
Accordingly, founders are not encouraged to share failures with funders and it becomes difficult to try innovative approaches. A challenge for innovation is the grand master plan — most funders expect a detailed proposal that does not allow room for learnings and agile changes. Funds are provided for delivering a project with preset steps not a creative solution to a problem. I have seen this in my own work with the German agency for international cooperation giz where a lot of time is spent for writing perfect proposals and execution is handed over to an operational team. The process does not allow for ownership of the problem.
Other challenges include donor’s focus on small overhead, limitations on potential beneficiaries, slow grant approvals and additional costs of compliance.
New Ways of Funding for Impact
Investing in social business creates a trade-off between returns and impact.
Chang sees a requirement for unrestricted funding — funders give general operating support and empower social businesses to make their own investment decisions. The decrease of control needs trust and a system of accountability for outcomes. Examples include tiered funding as adapted from the world of venture capital. It deploys funding based on maturity and evidence of impact. Prizes are awarded for shown success post-factum. Finally, with social impact bonds governments only pay social businesses for outcomes once they are deliverd. The financial risk is assumed by private investors who get paid a promised rate of return if the provider is successful. This is validated by an independent evaluator. Due to the complexity and number of stakeholders, the setup of social impact bonds is complex and costly.
Conclusion
The book gives a good introduction for Business Designers interested in impact. Because of the familiar language the novelty is easy to transfer. Chang’s long experience in the field resulted in a great collection of examples. I believe the application of these principles can help to increase the effectiveness of social businesses.
Chang believes that private initiatives are more efficient than the state and that services for the public should be provided by businesses. The government is seen only as a source of finance, while its normative role and responsibility to translate social values into action is underemphasized.
Big funders and their focus and effectiveness on single tasks is lauded. She explicitly talks about the importance of understanding “how SF people think” without questioning the legitimacy of their funds. Social businesses are subject to the hopefully good intentions of philanthropists instead of a democratically determined allocation of funds.
Eventually, the difficulty of measuring impact will probably remain the biggest problem. Setting up a theory of change and measure the improvements will take up valuable resources from small startups and might make them focus on problems that are easier to measure. It makes me re-appreciate the allocative function of money and the market. In a recent article Evgeny Morozov asked if big data could render the imperfect price system redundant and replace it with planning on direct information. When I look at the difficulties of social businesses it makes me quite pessimistic about non-monitary measurements.
After all, Lean Impact provides a language to talk about the specific problems of social businesses and proposes a framework to make their work more effective and increase the impact they have.
