Sonal Shah is the former Director of the first White House Office of Social Innovation and Civic Participation, and is currently a Tides Fellow. She has authored this outstanding piece for the new Tides Foundation journal, Momentum.
Social Innovation is fast gaining traction in the United States and overseas. While not a new concept, there is growing recognition that in order to change our trajectory and solve some of the world’s greatest challenges, there needs to be real innovation and scale in the social sector as well as the economy more broadly. The current structures created for addressing social problems are inadequate and incentives are not aligned toward achieving outcomes. Hence, social innovation is about building the infrastructure necessary to create an economy that can have a transformational impact in our country and the world around us. This investment in an “impact economy” has the potential to create jobs, economic value, and social benefit for the US and the world. Creating this economy and having real innovation requires an investment in non-profits, for-profits and hybrid enterprises to develop the necessary ecosystem for growth.
For too long, the definition of success has been the growth of an organization rather than outcome achieved.
The most important aspect of the impact economy is that each of these sectors measure results. For too long, the definition of success has been the growth of an organization rather than outcome achieved, for example, whether more children graduated from high school, or fewer people were diagnosed with diabetes. Instead, investors should be asking what problem the organization is trying to solve, and hold themselves and the organization accountable for achieving the stated objectives. This can be achieved across sectors: non-profits need to start managing to outcomes, not just outputs; governments need to assess how to align incentives to solve problems, not just keep the status quo; and businesses need to find better ways to partner with both governments and non-profits to help scale solutions.
This requires a real investment on behalf of philanthropists to help build the infrastructure that can meet this demand, and build the ecosystem to help create the next generation economy. As the growth and demand of the impact economy increases, there will be real opportunity to more clearly define the term “long-term value” to incorporate social and environmental criteria.
Non-profits
Non-profits play a critical role, providing necessary services to ensure a more educated, healthy, and prosperous society. They work within local communities, across communities, and nationally to address some of our nation’s and world’s most critical challenges. These are largely grant-based organizations like the Latin American Youth Center, YouthBuild, or Year Up. However, as budgets at local and national levels become tighter, it is important to ask what new models need to be developed to help solve some of the tough challenges. Policies and investments in the sector need to focus on the evidence of impact – not just on number of people served. In his book Leap of Reason, Managing to Outcomes in an Era of Scarcity, Mario Morino offers a critical view of how leaders and investors of non-profits can best manage to outcomes, especially in an era of decreasing budgets. Grant-based models are changing and it is even more critical to develop new ones, with the appropriate incentives to achieve real results. Philanthropy and government need to support and scale innovative new models and structures that have the potential for transformational change.
For-Profit Enterprises
For profit businesses and enterprises are also critical to creating an impact economy as they have the greatest potential for reaching scale. According to B Lab, there are 50,000-60,000 mission-driven businesses in the US. These are not corporations practicing corporate social responsibility (CSR), but firms specifically created to achieve social purpose and deliver financial returns. These enterprises come in many forms and stretch across industries: from privately-held manufacturing businesses such as Interface Carpets in Atlanta, GA, to publicly traded automotive companies like Tesla Motors in Palo Alto, CA; from dynamic software startups including iContact in Raleigh, NC, to corporate-owned beverage companies like Honest Tea in Bethesda, MD (which was acquired by Coca Cola in 2011). Investment in these types of businesses is called “impact investing” because they create both social value and have financial returns. According to the Monitor Institute, this is considered to be a $50 billion market that could grow tenfold by the end of the decade. Foundations like Rockefeller, Kellogg, and Heron are already experimenting with “impact investing.” There needs to be greater investment in the sector to create more businesses and a longer conversation with larger corporations on how CSR can more effectively achieve social change while keeping a business focus.
Hybrid Enterprises
The third sector in the impact economy is made up of hybrid or social enterprises, which are neither non-profit nor strictly for-profit. Generally they are innovative non-profit organizations that are driving revenue through dynamic earned-income models such as Greyston Bakery in New York City, the Chrysalis workforce training program in Los Angeles, or Aravind Eye Hospitals in India. These social enterprises, like for-profit businesses, believe that organizations need to do more than generate shareholder returns, they must also build value chains that bring value back to the communities that they serve. Whether job training or green jobs, hybrid organizations are creating a new form of engagement between companies and non-profits. In some cases like Aravind, they are introducing new efficiencies in the market while maintaining incredible quality. When investing in these enterprises, investors should help develop effective business models or continue to scale the existing models, while also providing capital—or outright grants—to continue to innovate and adapt to the needs of the market.
We have an opportunity to define new structures that will last into the next century. We can either continue to work at the margins, make small changes, and hope for the best; or we can create new business models for each of these sectors, ask ourselves the tough questions about the impact we want to have, and make some radical changes. The real question is whether we are willing to make the necessary investments and take the risks needed to create a new impact economy that can fundamentally transform our world.
