The challenges of scale

Where is the Mark Zuckerburg of the UK social sector and who, if anyone, is going to help him to get his organisation from his bedroom to the point where’s it’s delivering positive social change on a significant scale?

That’s the question raised by Craig Dearden-Phillips is this typically provocative blog post. In a response last week, Nick Temple rightly highlighted the need for support for non-tech social enterprises, but the general points that Dearden-Phillips is making apply to social innovation in any branch of the social sector(s).

The Mark (or Martha) Zuckerberg of the social sector is currently, according to Dearden-Phillips: “just coming to the end of a small social entrepreneur development award and wondering where it’s next investment is coming from… He is over-trading massively already (trying to show his model works) and he only has nights free to work on the five year P & L* and cashflow being demanded by a po-faced group of former bank staff who are now running his social investment fund.

The difficulty with that is that: “… he hasn’t a clue about his P & L, or the scale-up potential of his model.  He just knows he has something which works and that he wants to devote his next five years to showing this to be true.”

The ‘po-faced former bank staff’ are having none of that: “they see his rather rough-cut plans, give him a hard time about the mistakes and send him packing on the grounds that this risks being good money after bad.  Everyone feels like they have done a good job and another sector changing idea quietly dies.

As a result: “Our Mark Zuckerberg figure, now 30 and broke, is forced to get a job as a social enterprise investment adviser (there is always funding out there for those) and the world continues to turn.

Dearden-Phillips verdict is that:  “Today’s social innovator has to walk a fine line between telling a good story of revenue today and a ton of jam tomorrow. If they can’t do this, they don’t get through the kind of assessment processes that are too hard too early (and indeed cost more to run than the amounts they invest).”

Dearden-Phillips thinks the problem is that UK social investors are too risk averse. One of many recent reports on social investment to support that conclusion was The First Billion last year’s Boston Consulting Group report for Big Society Capital which noted that: “the demand for social investment will be focused on a set of higher-risk financial products, such as unsecured lending or quasi-equity, where returns are linked to the financial success of the organisation”  whilst  the vast majority of existing social investment is in the form of secured loans.

It’s definitely the case that, if there’s going to be any link between social investment and social innovation, social investors need to be willing and able to take bigger risks than non-social investors. The current situation is particularly bizarre because social investment intermediaries are currently simultaneously dependent on subsidy to keep going and not making risky investments. So you have organisations with, on average, 55% of their operating costs covered by grants, spending (a significant proportion of) those subsidies on conducting complicated due diligence process that enable them to prudently decide not to risk money on socially innovative proposals from organisations that don’t own a building.

This model may need some tweaking but while the social investment sector clear has many questions to answer, it’s not entirely to blame for our failure to match voluminous rhetoric around social innovation in the UK with real life successful social innovations.

Part of the problem is that we’ve apparently embraced the idea that supporting social innovation, and investing potentially profitable trading charities and social enterprises to enable them to scale up and grow, are the same thing. In reality, they’re separate activities which sometimes overlap.

The work of the RNID in transforming NHS audiology services is an example of spectacular social innovation that was based on a funded partnership between the between the public sector and a charity. It was the scaling up of an innovation – new hearing aids and ways of providing people with them at a low cost – rather than the scaling up of a business.

Similarly Star Wards – which provides ideas for improving inpatient mental health care, based on the experiences of patients – is an innovative way of delivering social change that is scalable at low cost, while remaining primarily grant-funded.

Social innovation means developing ideas for positive social change and making them work. While wondering about how the UK social sector can support its up and coming equivalents of Mark Zuckerburg and Facebook, we should also be considering how we could support the people developing our equivalent of Wikipedia – not necessarily an online organisation but an organisation with a similar ability to deliver a significant and sustainable social impact without aspiring to turn its core operations into a trading business.

There’s no reason why social innovation can’t also take place within services delivering directly by the public sector. There is no evidence that charities and social enterprises are inherently innovative nor, as RSA chief executive Matthew Taylor pointed out in a recent interview with me for Pioneers Post, is there any evidence “that the private sector has got some kind of secret capacity for innovation which is absent in the public sector.

Writing for The Guardian‘s Social Enterprise Network, minister for civil society, Nick Hurd, envisions a ladder of progress for social enterprises from the early stage support provided by the government’s Social Incubator Fund on to the Investment and Contract Readiness Fund, on to ‘real impact at scale’ based on ‘attracting serious investment’. Even if the social investment market can be made to work (and that’s clearly a big if) the primary focus of this model  is on building businesses (to deliver public services) not on delivering social innovation. Building socially innovative businesses is a good thing but we also need to consider how to support and, if appropriate, scale-up ideas that deliver positive social change but aren’t businesses.

*For those of you not in possession of an investment readiness training grant, P&L means ‘profit & loss’.

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7 Comments

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7 responses to “The challenges of scale

  1. Another great blog David – you really are the person to read these days: you really think things through, you assemble material well and you are unafraid of naming elephants. So much blogging (including much of mine) is off the cuff, under researched and lacking in rigour. You deserve your growing audience.

    Your distinction between social innovation and scaleable business are well made; social innovation indeed does not need to take the form of a business. Nor does business scale necessarily grow an innovation (though this remains a mechanism).

    On public innovation I am still in a formative place on this. Social innovation has and does take place in the public sector and examples of this abound. The question for me is whether we see ENOUGH of this, whether it happens QUICKLY ENOUGH and whether the culture of the public sector is SUFFICIENTLY supportive to enable social innovation (preoccupied as it is with the avoidance of risk, large scale delivery of today’s services and a stakeholder approach which requires buy in at many levels before an innovation is accepted. By ‘public sector’ you can read any large organisation that is culturally inhibited around innovation.

    My ‘evidence’ comes, as usual, from my own life experience. I have seen remarkably little public sector led social innovation in relation to services for people with learning difficulties. Almost all innovation has emerged from outside, certainly in the last 20 years .

    Obviously we are now veering a little into politics but I do see the public sector as a net brake on social innovation when compared to others. This isn’t so much ideology as an observation of the nature of large multi-stakeholder organisations.

    In short I think that social innovation requires very fertile soil – and added compost I before of a highly permissive culture. Except in pockets this is not my experience of the public sector.

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    • Beanbags admin

      Hi Craig,

      Thanks. I think what you’re saying about the public sector is right – based on my experiences both working within the public sector and engaging with it as someone running a social enterprise – but I don’t think it’s inevitable.

      Public sector organisations are clearly right to want to minimize the possibility that people using their services will experience physical injury or emotional trauma but there are certainly public sector managers – and some politicians telling them what to do – who seem to view the risk that someone people might notice that their service is doing something differently and be annoyed as being on equal level.

      This risk of corporate loss of face, which many people in the outside world may not recognise as risk at all, is a major barrier to innovation. The fact that there’s less money to go round may make this a good time for some enlightened (probably local) politicians and senior manager to put on united front and say ‘we haven’t got enough cash to do this the way we used, we’re trying something different, it may not work’.

      The key challenge is to get innovation out of specialist ‘Innovation Units’ and into everyday operations – so that staff and people who use services can be encouraged to come up with ideas to make services better, rather relying on outside innovation specialists to come up with the answers.

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  2. David, I’m reminded that as a “tech” social enterprise we approached goverment in 2004 proposing application for social,benefit, saying.

    “The emerging Information Age will provide an unprecedented opportunity for outreach and communication at local community levels by way of the Internet. Given the opportunity to communicate and research global resources, communities will become able to assess their own needs, identify resources to meet those needs, and procure those resources. In that sense, the information economy can work to the advantage of impoverished people in a way never before possible.”

    it was 2004 and Facebook arrived, while our focus turned to Friends of Beslan among other things, which involved developing a small network of sufficient trust to forward funds providing small comforts, but mostly to develop the culture of friendship and compassion I describe in efforts to create a fundamental science education centre from a former weapons reasearch establisment.

    http://economics4humanity.wordpress.com/2012/05/22/peace-is-our-business/

    In the wake of Russia’s economic crisis of 2008. we’d suggested an inversion of the top down approach as the start of our mission to ‘replicate localised people-centered economies on a global basis’ rather than scale. This was a post corporate vision.

    The Tomsk regional initiative was a city level experimental project which USAID replicated in several others. For the UK, a national strategy was put forward, based on the community investment model, a progenitor of the CIC with an embedded “pay it forward” model for seeding new enterprises. .

    Tomsk was an embarrasment for Harvard, home of Facebook and Deloittes who attempted something similar but according to locals had spent all the budget on their consultancy costs,

    Coming from the world of business to approach a ‘po faced’ and often controlling third sector, we understood what P&L meant:

    “Substitute personal greed with compassion, and the balance sheets will still work out just fine. Profit/loss statements take on a whole new dimension and meaning. Greed and capitalism are not one and the same thing. “Social” capitalism, social enterprise, is perfectly doable. This is the most effective sustainable strategy available for alleviating widespread human suffering stemming from poverty and all that comes with it — up to and including terrorism.”

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  3. Hi David and Craig. I worked on the RNID campaign you mention and it was a joy because it was the only real experience I’ve ever had of secondary innovation that brought together the real strengths of each sector. James Strachan, the real architect of the project, was a profoundly deaf merchant banker with a personal interest in the subject and also in the strengths of the voluntary and public sectors. He spotted the massive power of the NHS to drive down the prices of the private providers with some simple horse-trading (“we’re doing this with or without each of you manufacturers – you can provide the technology at a high per-unit cost and be left out in the cold or you can bring your costs down and we will ensure you can sell millions more units”). The audiologists that joined the project from the public sector were amazing at designing the role-out in a sensible, modern and user-driven way. And at RNID we were able to house the project while showcasing its strengths and shouting loudly for the Govt to roll it out nationally, with the power of hundreds of thousands of members who were passionate about the cause and saw it as a vote-winning or losing issue. In fact it did require businesses to scale-up. The manufacturers saw a huge surge in demand for their product and they had to find ways to bring down the per-unit costs (I think they saved a fortune on their marketing budgets once the NHS became a ‘sure thing’). And the technological upgrades acted as a change-agent for deprived audiology units across the country – they had to be invested in to keep up with the changes.

    What made the project stand out was the fact that public sector purchasing power was leveraged in a way that brought huge benefits to the taxpayer. I worry that the momentum the public sector gained through this and other projects in using its market-making power to great effect is getting slowly lost as Govt rushes to outsource at arm’s length and put prime contractors in the driving seat on public sector delivery. Public sector capabilities become fragmented as departments negotiate separately, are looking for short-term savings and are not looking at broad enough outcomes. The VCSE is left in a submissive position and the taxpayer loses. Outsourcing could be done in much smarter ways, using proper hybrid models like the one RNID used all those years ago. The social sector has traditionally been a place where experiments can be done in a ‘safe’ and effective way, and I’d hate to see this lost as service delivery models change, although charities have to pay their bills and can’t stay out of actual service delivery, booing from the sidelines.

    I firmly believe that the most effective social innovations are often secondary and come from bringing different methods and mindsets together on a level playing field. This requires real power-sharing and openness to others’ skills and understanding. I think your frustration with non-evolved, classic private-sector methods, models and mindsets being brought to the social sector comes across loud and clear and tackling that will be key to any ‘great leap forward’ in social investment and social enterprise in the next decade. For some of us, the fact that the different worlds have now collided has been a long time coming and there is lots to play for. It’s great that your blog is keeping the pressure on the social sector to play its best.

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  4. Beanbags admin

    Hi Celia,

    Thanks for this. It’s really good explanation of the kind of problem-solving approaching to innovation that I’d hope any government would be looking to promote more of. As you suggest, it’s not clear how a continuation of the present government’s pseudo-marketized carve up approach to public service reform – demonstrated most dismally by the Work Programme – is going to lead to more of that happening.

    I completely agree that if different worlds – public, private and VCSE – are now colliding that’s a good thing but also agree that it’s important that the different sectors are making the most useful contribution they can based on their relevant strengths.

    The very obvious flaw in the plan to copy and paste what you describe as ‘non-evolved, classic private-sector methods, models and mindsets’ into the worlds of social investment and social innovation is that many social challenges are being tackled by the social sectors in the first place due to market failure.

    Often the correct business decision about whether to tackle a particular problem, or help a particular person or group of people is ‘there’s no/not enough money in that, we won’t do it’. Markets do have big role to play in the social sectors but not as judges of social value.

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  5. Today, in the Guardian social enterprise hub, we’re being taught how to suck eggs by a secret social entrepreneur. For us it was very important to do this as publicly as possible, in radical transparency by publishing in a magazine to protect the social mission from predators.

    The definition we made was introduced directly to the British Council and the EU and now being used by both of them. It was also introduced to the SEC when we became members in 2006 and were told this was outsode their focus.

    http://www.p-ced.com/1/node/80

    The issue of NHS and cost of suppliers is something that came up in our own experience in activism for disability where my local MP, the disability spokesman became one of the obstacles.

    http://www.p-ced.com/1/node/78

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  6. Pingback: The Best of the Blogs: Part 2 of 3 – David Floyd | THOUGHTS PROBABLY SOMEONE ELSE'S

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