Before Social Impact Bonds:
Build A Next Practice Lab
It is funny to feel old enough to say I am a veteran of anything. But in this case, it just might be true:
I am a veteran of the rise, growth, and scale of creative social finance tools.
And I can say with good confidence that public service leaders shouldn’t be talking about social impact bonds unless they have a Next Practice Lab to (1) explore holistic solutions to issues, and (2) keep funded solutions current, desirable, and viable.
First, a little history.
Social finance refers to the tools that have been applied to how we finance the development, scale, and spread of business models that address social needs, e.g. food scarcity, electricity for the rural poor, early childhood development.
Social finance began with the early days of organized philanthropy and the emergence of foundations. This was just post-World War II, and funding from foundations served as the R&D arm for social services. Those services that proved successful would be adopted and scaled by the government.
Over time, this value chain got diluted. Foundations started generating their own theories of change; funded more than R&D — including organizational capacity and going to scale. Government funding for social services changed as well, often driven by changes in political power and support for public welfare. And of course, social services changed — both becoming more independent from government and often more systemic in nature — seeking to address the root of the issue in addition to presenting symptoms.
Fast forward to the 1980s and the emergence of social entrepreneurship. Social entrepreneurship catalyzed three changes to the landscape:
(1) A bias for transformative innovation — the belief, mindset, and entrepreneurial drive to solve problems in wholly different ways;
(2) An emphasis on creative revenue models — primarily earned income — to enable flexibility, independence, and sustainability of this “innovation.”
(3) An imperative to “invest” in social change, and the corresponding emergence of a social financial ecosystem.
Firms, like Ashoka, grew to support early-stage ventures. Impact investors, like Acumen Fund, started putting “patient” capital into later stage ventures to help them scale. Social investors started divesting from traditional investments with a straightforward financial return, into portfolios, like State Street, that could measure/report on double, triple, and quadruple bottom lines. Crowdfunding platforms, like GlobalGiving, cropped up, creating new purposeful and lucrative relationships of donors and social change agents.
As the ecosystem developed, social impact bonds — or “pay for success” — emerged on the horizon, promising to replace antiquated models with less expensive, higher impact solutions; these new models would be financed by the savings realized by making the transition to a faster better model, i.e. the “bond.”
But before public service leaders go gaga over the promise of social impact bonds, it is important that they first establish a Next Practice Lab.
Here is why:
We Need Better Models.
If you take any expensive, messy issue in the United States — from incarceration to affordable housing, you will find this commonality:
They are complex and interconnected.
Public service leaders struggle to work in this complexity. In their struggle, they silo and narrow problems, shrinking them into manageable “point” solutions or “tweaks.”
Hence, when we consider issuing a social impact bond to finance the scale of a less expensive solution to the status quo, we get scaled solutions that are only relative to how we currently understand the problem. Meaning, if you frame the problem as incarceration, you get a less expensive, more effective solution to dealing with people in the prison system.
However, there are opportunities when we work in the messiness of an issue, and when we can frame it in new and different ways.
For example, what if we had a framework for understanding the supply AND demand side of incarceration? What if we had a framework that helped us explore next practices for addressing systemic racism amongst police ranks or the impact of chronically homeless youth (forces of supply)? What if we had a framework that helped us explore next practices for addressing the “pull” of poverty that creates demand for prison systems in communities? What if we have a framework for exploring next practices that span both sides of the equation?
Human-centered design, the core to BIF’s methodology, helps leaders shift how they understand a problem, see interconnections, and better frame wholistic solutions. That is one benefit to a Next Practice Lab; it can generate more holistic models that can be scaled by social impact bonds, getting more bang for the taxpayer buck.
The Half-Life of Scalable Models is Getting Shorter
The other thing to consider is the problem with long-term financing of long-term solutions. Does this really work anymore?
The truth is that models don’t stay relevant for very long. The needs of the market (or the job that consumers, citizens, etc., need us to do) change regularly. Public services that are committed to a single model fail to keep up with the changing needs of users, in fact, because they are too focused on executing their existing model. Further, they are at risk of being disrupted by organizations who can more nimbly and more flexibly address the dynamic needs of customers.
Solutions become antiquated very quickly. This is the challenge with “best” practices versus “next” practices. Because of the changing needs of users, we will always need a “next” model to implement and scale. Is issuing a bond to finance the scale of a solution that might be outdated in a few years worth it?
What if there was an “and”? Meaning, what if public leaders could scale a model, and allow it to get better on an ongoing basis? This is the second benefit of a Next Practice Lab; it can help inform models, develop learnings that kept them relevant and evolving, generating a better, longer-term ROI.
It’s not that I believe problems are too complex or too much of a moving target to address. It is that I believe public service leaders would have better impact if they nest a Next Practice Lab alongside social impact bonds in order to inform, instruct, and adjust the portfolio of investments funded by social impact bonds.
Here’s why:
Human-centered design helps leaders shift how they see and frame a problem — helping them design more holistic models for creating and delivering value while capturing better returns for the taxpayer. These are next practices, and a lab delivers the capacity to manage a portfolio of next practices on an ongoing basis. These next practices can help leaders identify new business models to scale through social impact bonds or they can be in service of a funded model — helping it develop new capabilities and adjust to changing environments.
The benefits to public service leaders are that (1) it reduces the risk of issuing a social impact bond and (2) it extends the shelf life and ROI of funded models.
The benefits to citizens? More holistic solutions to the problems we actually experience, at a lower cost, and longer timeframe. I’d sign up for that.
