Dec 4, 2017
Why Cost Is Important in Social Innovation (And What To Do About It)
Co-authored with Caitlin Tulloch
There’s a fundamental truth about humanitarian practice today: there’s not enough money to meet global humanitarian needs, and that’s unlikely to change any time soon. This is a hard truth, yet in the social sector, it’s often very difficult culturally to talk about the trade-offs between spending on different programs which could all address critical humanitarian needs.
At the Airbel Center, our mission is to develop solutions that are both more scalable and more effective than current humanitarian practice. To achieve that mission, finding new ways of working requires us to reach more people with limited resources. This means that, as innovators, if we truly care about scale and impact, we must also pay close attention to the cost efficiency of the things we create — regardless of whether cost is a difficult subject to talk about.
Putting that aspiration into action means figuring out how and when to integrate financial data into our work. Below is a summary of what we have done in a number of our projects, and examples for other practitioners of how costing can add value in a social innovation process.
What We’ve Been Doing
Airbel has been experimenting with how and when to integrate cost information into the problem-solving and the management of our projects, and we have been asking questions like:
-What does it mean to integrate cost into program design?
It doesn’t mean just budgeting or financial analysis — it’s about the ratio of resources used (across all actors, where that can be assessed) versus outputs or outcomes achieved.
-What kind of cost analysis do we do, and when do we do it?
We have used all of the following in different stages of evaluating projects:
- Simple estimation: How much does it cost to develop a website? Recruit 5000 people?
- Cost-efficiency: Is the cost per person that we will eventually serve feasible for organizations to cover?
- Cost-effectiveness: Does this deliver outcomes per dollar any better than current practice?
- Cost-benefit/ROI: Is the total benefit worth the total cost?
- Scenario analysis: How do costs scale with the intervention? How would our cost-effectiveness be affected if the context suddenly changed?
-How do we know when something is ‘expensive’ or ‘cheap’?
There are a number of common approaches to benchmarking, depending on the quality and comparability of data. We’ve found that three scenarios are common:
- Globally available, high quality benchmarks exist (e.g. health): We use them!
- Internal data about analogous programs exists: We will often look for past IRC programs in the region with a similar organizational footprint. IRC’s Best Use of Resources team has developed a tool that makes creating cost-per-person estimates for IRC programs relatively simple (watch their video demo here)
- When no benchmarks exist: Consider numeraire interventions like cash, or compare to government sectoral spending, or GDP per capita (for example, if GDP per capita in a country is $400/person/year, a $1000/person/year intervention is unlikely to be viable).
For additional methodological tools and guidance, check out the full report.
Insights Learned About Integrating Cost into Social Innovation Practice
In the last 18 months, we’ve learned a lot about how to integrate costing into iterative design processes, and what is most valuable from doing it. Here are six key principles we have learned, with examples from our projects.
1. Identifying cost benchmarks for the current best practice in a sector is fundamental to deciding where and how to focus innovation resources
A core routine of defining the problems we want to solve through an innovation process by sizing the nature of a problem, and then be specific about why current practice is not solving it. Within this process, understanding how much current best practice costs to produce intended outcomes helps specify a rationale for investment, as well as helps us understand what ‘good’ would look like if we’re successful.
This chart comes from IRC’s cost efficiency analysis of malnutrition treatment programs. We learned from this example that the Community Management of Acute Malnutrition protocol is cost-effective in densely populated areas, but becomes less cost-effective when population density is low. This has informed a focus on creating a different protocol for reaching children in rural areas.
2. When envisioning or developing new concepts, using your intuition and simple estimation about cost is just fine
Early stages of social innovation usually involve simple program sketches, reimagined user journeys, or even approaches like “use behavioral science.” Instead of trying to concretely estimate costs at this stage, just think through whether the resources needed for an intervention (especially human capital, infrastructure) will be present in places where you might scale.
Example: Even at this stage it’s possible to challenge your assumptions, about the cost/benefits of technology — David Evans discusses that the impact of EdTech on early grade literacy has been mixed, and even where impact is large, the high costs of some of those programs mean they often would not be more cost-effective than implementing other proven programs.
3. Once you have concrete concepts (usually after prototyping), costing can help you prioritize which ones to further pursue
In general, we recommend developing a robust cost estimate of your solution once it has reached a stage of clarity through prototyping, but before you take it into a pilot stage. This is the “sweet spot” where costing helps you compare different strategies before making large investments. It may help you prioritize which concept to try first, or stop you completely before sinking significantly more resources into them through further prototyping and piloting.
4. Estimating cost at different scales to help clarify your thinking about scale
Costing not only forces you to be specific about what you mean by “scale,” but also requires you to think through assumptions about how an innovation would scale over time. One potential benefit is that you can also see how your costs scale as your implementation grows larger. Do they rise at the same rate as the number of people reached, or do you gain “scale efficiencies”? In the example below, you can see how costs change as the total number of people reached gets larger.
5. Understanding what resources drive the cost-per-person gives you lots of information about how to scale your solution
Creating cost estimates for concepts forces you to make specific judgments about how much “product” you can deliver for a given amount of money (see example below). This information is valuable in multiple ways: First, it may help you rule out concepts that rely heavily on a scarce resource (e.g. we need 3,000 highly skilled trainers). Additionally, being specific about your assumptions of cost by component (e.g. number of people who attend each training), also gives you insight into where a solution is likely to be most cost effective, and hence where you could scale for maximum impact. If your solution relies on a high trainer-to-participant ratio, inexpensive transportation, and consistent access to supplies, spelling out the cost model will help you understand where scale is or isn’t feasible.
6. In the long run, cost effectiveness data can make a powerful advocacy tool for scaling your solution
Perhaps the most exciting reason for innovators to integrate costing into their practice is that being precise about the cost vs. effectiveness of your approach compared to other strategies can be a compelling way to advocate for shifts in funding that can enable the adoption of your innovation.
For example: The Heckman equation showed how early childhood programs were more cost-effective than other education investments made later in life, and this was a key milestone in shifting US investment into Head Start and other early childhood programs. In our partnership with Sesame Street, the IRC hopes to generate similar evidence about the cost-effectiveness of early childhood media and parenting programs in improving developmental outcomes for children displaced by the Syrian crisis.
Integrating cost information into social innovation is not a simple task, but at Airbel we think it’s an essential and valuable piece of any social innovator’s toolkit.
If you’d like more information about our methodology or our resources required to do costing, please feel free to leave a comment or email us at airbel@rescue.org.
