The squeezed middle

Social investment finance intermediaries, often known by the acronym, SIFIs, don’t generally enjoy a positive reputation among UK charities and social enterprises. As with MPs, many of us like and respect SIFIs and their employees individually but the emerging industry is not popular.

That’s mainly because, since social investment hit us (in a big way) in 2012, there’s at least been a perception that the government (in particular) has put loads of money into subsidising the process of and support for social investment, while not spending enough making social investment affordable or useful for charities and social enterprises.

As someone who talks to and works with lots of people in the intermediary business, I’m yet to meet one I’ve disliked or felt was in it for the money but genuine intentions are not the same thing as delivering value.

Never one to play to the gallery, Clearly So boss, Rod Schwartz uses his latest column in Third Sector to make the case for SIFIs (or ‘impact investment intermediaries’ as he’s calls them, possibly in order to communicate with a global audience) charging funders £1,000 a day for their services.

Schwartz’s motivation to speak out is a conference-based conversation with a funder who claims that intermediaries are “incredibly greedy” and that their £1,000 a day charges are ‘indecent’; Schwartz responds with the request that we ‘look a bit deeper’.

The fact that Schwartz is initiating this conversation at all is positive and increases the credibility of both Schwartz himself and the wider ‘intermediary’ sector. He deserves respect for tackling that issue head on rather than blithely pretending it doesn’t exist.

He’s also at least partly right, because a large part of his response to the funder’s charge of indecent greediness consists of an explanation of why buying a set number of days of professional services, delivered by skilled people, is often expensive: “Behind each professional is a team that carries out HR, administration, finance, legal and so on, but whom you don’t bill for their time. In addition, there are sales teams that generate costs and do not win every pitch – and that, even if successful, cannot bill that time to the client. Nearly half the fee is eaten up this way.

This is pretty uncontroversial stuff in itself and strong rebuttal to anyone who really thinks the/a problem with intermediaries is the grasping personal character of the individuals working for them.

Unfortunately, when Schwartz moves beyond the general, rather defending intermediaries fees’ based on either commercial or social value they deliver, he ends up on more contentious ground: firstly by explaining that intermediaries are expensive because they’re based in London, then by pointing out that they do complicated work on ‘transactions’ that ‘are no less complicated than in the mainstream’.

It seems that, possibly due to a decade or two of exposure to voluntary sector thinking, Schwartz has gradually ditched venerable market-based approaches to pricing and value, and is now on the verge of coming out as a supporter of our umbrella bodies’ much-loved, if semi-mythical, ‘full cost recovery’ model.

I’ve been to the workshops and I know that in a market system this stuff  is not really very complicated at all. Intermediaries either prove their commercial value to their customers – a funder pays £10,000 for 10 days work and is satisfied that at least £10,000 of value is delivered to their organisation as a result – or they don’t.

The funder doesn’t need to know where the intermediary is based or how complicated their work is, they just need to know that they’re getting value for money. And frankly, if an intermediary can convince you their input will make the difference between you making a £1million investment that clearly delivers major social returns and some financial return, and making a £1million investment that loses you money while delivering nothing much, that there’s no obvious reason why they shouldn’t earn their £10k in 5 days.

Unfortunately (or otherwise) most intermediary activity in the UK takes place in the dark and distorted world of subsidised markets, where the label ‘intermediary’ or SIFI covers organisations who deliver (some of) a wide variety of different functions, including managing investment funds on behalf of government and other investors, and supporting organisations to become ‘investment ready’.

Intermediaries whose role is to manage and invest social investment funds on behalf of government and other non-City-based investors, or to support organisations as providers on a national programme of government grant-funded investment readiness support, such as ICRF, do not need to based in London for practical reasons but they generally are based there.

Currently some non-London-based charities and social enterprises receiving grant-funded consultancy from London-based intermediaries find themselves paying both high day rates – because intermediaries have to fund the high living costs of their London-based consultants – and peak time travel costs for those consultants to travel up from London for the day.

Fortunately, even in this deeply distorted marketplace, genuine market values still offer an obvious solution. If you’re an ICRF or Big Potential provider and the cost of living in London is forcing up your day rate and leading you to pile huge travel expenses on top, you can move. You can get somewhere quite nice in, for example, Leeds for £200,000.

When it comes to the problem of intermediaries being so costly because their work is complicated, market philosophy once again offers a stark, clear route through the swamp of subsidy. That is, that if intermediaries’ work is so complicated that it’s not possible for them to do it for the money available, they should stop doing it. If all these skilled people quit the market, and the market needs them, it will pay them more to come back.

Or it won’t. It probably won’t but plenty of us want to go and live on full cost recovery island and many would like to fly there on Concorde, sadly (social?) business doesn’t work like that and we have to choose whether or not to do what we want to do for what we can get for doing it.

Schwartz illustrates with his own discussion when he says:

I asked him what his outfit paid its lawyers a day, ‘That’s different,’ he said. ‘What about your accountants?’ I asked.

He argued that too was different.

I’m no legal expert but I understand that being a legal aid-funded defence lawyer for a penniless person is not, in itself, less complicated and skill dependent than being a privately-funded defence lawyer for a billionaire.

It is a bit less lucrative. In June 2013, Law Gazette reported that within the UK’s legal aid system (according to The Bar Council): “under the current rates, the most experienced silks doing the most serious cases such as murder get paid £550 a day (covering a full day in court and two hours preparation). Half of that has to be taken out to cover overheads… So in reality, she said they earn £275 a day.  

Fortunately, our government is now socking it to the highly subsidised  fat cats so that:  “Under the proposed cuts, those figures will fall to £350 and £175 respectively.

The point is not that it’s right that experienced lawyers are now being paid £175 per day (or that there’s any directly comparison between their work and that of intermediaries) but that highly skilled professionals are often paid extremely badly in situations where their work is not commercial.

We’re a nation with some strange approaches to valuing social good – in many local areas the average hourly rate the state pays people to care for an old person is less than the average hourly rate private individuals pay people to walk their dog – but it’s not clear that social investment intermediaries are getting a specifically bad deal in non-commercial markets. Where their customers are paying directly, they just need to get better at selling their services.

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4 Comments

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4 responses to “The squeezed middle

  1. David It’s been some years since I was hired out as software consultant. The client, typically another corporation or goverment can pay in excess of £1000/day for a specialist’s services today.

    Remember that joke about the management consultant who leaves you with a report recommending that you’re mugged by 3 of his closest friends?

    Consider the management consultancies which are ubiquitous in government departments. Up to £2000/day according to a Guardian article last year and over £300m in total spending.

    Clearly there’s a benefit in hiring local resources when it comes to regional projects or those who are lean and tightly focussed. In Russia our founder’s consultancy fee to US government was a flat $15,000 for several montns work.

    We weren’t first on the scene in Russia, It had been something of an embarrassment for Deloitte Touche whose efforts at creating a microfinance initiative preceded the Tomsk Regional Initiative. They’d closed down after the first loan recipient orientation session. According to locals, they’d depleted the budget with their own consultancy fees.

    Rod Schwartz appeared on my horizon several years ago when he became a regular contributor for Skoll Social Edge. He’d come from Lehman Brothers, where he’d held several management positions but none in social enterprise.

    It looks increasingly like a lost cause for grassroots orgainsations, There are however other ideas out there. Chris Cook for excample, a former Director of the International Petroleum Exchange and his concept of Capital Partnerships which are asset rather than credit driven.

    As you may see from this fairly recent slideshow, he describes how this can maximise community benefit in a renewable energy context.

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  2. “In addition, there are sales teams that generate costs and do not win every pitch – and that, even if successful, cannot bill that time to the client. Nearly half the fee is eaten up this way.”

    Why can’t SIFIs move beyond the pitch model? Pitches aren’t even a particularly good way of selecting the “best” value, for most values of “best”. I’m surprised more people aren’t looking at this.

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  3. A good point from MJ Ray above. Could we be wasting our time investing in arguments for social value, delivered in strategy plans? .

    Now that I think of it, it was on the Clearly So forum in 2009 that I argued for investment in social enterprise to be incentivised rather than giving social enterprise tax relief.

    Early that year, our presentation paper on Economics for Ecology, (call it a pitch), had warned that quantitative easing wasn’t going to fix a broken economic system.

    Social investment on a massive scale was what we’d argued for (another pitch) and we may readily measure the consequences of not doing so, in both financial and human terms.

    http://www.p-ced.com/1/node/372.

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  4. Pingback: ‘Rod’s World’… No place for social enterprise… | Can Cook - The Food Campaign

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