In recent years, scale has become one of the hottest topics in the non-profit sector. Not a day goes by when I don’t see a report or an email, or a blog post, or at least a tweet talking about the importance of scale. Much of the discussion is about how the nonprofit sector is not very good at growing organizations to scale. Many people are looking for ways to replicate private sector models of equity investing to help bring nonprofit organizations to scale. I have been frustrated by much of this discussion which I think often oversimplifies complex issues, exaggerates our ability to understand how societal change happens, draws false analogies between the private and non-profit sectors, discourages collaboration and encourages cherry-picking of the most profitable activities within the nonprofit sector while leaving the less profitable ones to smaller community based organizations.

So I was very pleased to recently come across two items that I think make important contributions to the discussion.

The first is an interesting article in the Stanford Social Innovation Review entitled Collective Impact by John Kania and Mark Kramer.  The article makes a rather simple and seemingly obvious observation – “Large-scale social change requires broad cross-sector coordination, yet the social sector remains focused on the isolated intervention of individual organizations.” Think, for example, about how our country was able to achieve such a dramatic reduction in smoking over the past 30 years. We used research, litigation, legislation, taxes, education, regulation, chewing gum, faith programs, advertising and many other tactics. No single organization or program made it happen.

Collective impact takes this idea to the next level of intentionality and focus. Collective impact efforts are designed to organize multiple players to unite around a common objective.  The authors outline five conditions of collective impact: (1) a common agenda; (2) shared measurement; (3) mutually reinforcing activities; (4) continuous communication; and (5) backbone support.

In Massachusetts, we have helped to promote this model through the Smart Growth Alliance’s Great Neighborhoods program and through LISC’s Resilient Communities/Resilient Families program. And I’m pleased to see the Collective Impact framework gaining attention nationally.    

The second interesting article I recently read on the issue of scale was an op-ed in the New York Times by David Bornstein called For Ambitious Nonprofits, Capital to Grow.  While this article does focus on how individual organizations can grow, it makes a very critical and important contribution to that discussion by talking about recent efforts by the Non Profit Finance Fund. Obviously, nonprofits need money to grow, but Mr. Bornstein’s article discusses the difference between what he calls “build” capital versus what he calls “buy” capital. Build capital is money used to build the capacity of a nonprofit organization and is analogous to private equity for a company. Buy capital is money used to operate programs and deliver services and is analogous to sales revenue for a company. Those who supply build capital have different goals and needs than those who provide buy capital, just as investors and customers have different needs.  Non profits – and their funders – must understand this distinction. And the nonprofit system must have adequate supplies of both types of capital if we are to become more effective.

Both of these issues – collective impact and the build vs. buy distinction are of critical importance to the Community Development sector. Should we be successful in passing the Community Development Partnership Act by the end of the legislative session on July 31, we will have an opportunity to put these ideas into action across the community development sector in ways that will allow us to achieve unprecedented levels of scale and impact across the Commonwealth.

MACDC is pleased to share this blog from Standford Fraser who is interning at NACEDA for the Spring 2012 Semester. He is currently a Junior History major and Community Development minor at Howard University.

Benefit Corporations are defined as a new class of corporation that 1) creates a material positive impact on society and the environment; 2) expands corporate fiduciary duty to require consideration of non-financial interests when making decisions; and 3) reports on its overall social and environmental performance using recognized third party standards. 

In April 2010, Maryland became the first state to pass legislation that legally recognizes benefit corporations (B corps). Today seven states recognize benefit corporations: California, New York, Vermont, New Jersey, Virginia, Maryland and Hawaii with legislation pending in Pennsylvania, North Carolina and Michigan. B corps are still unknown to a large number of community developers. The simplest way to describe them is that they exist somewhere between non-profits and traditional corporations, leaning closer to traditional corporations in their operations. An example of a B corp would be Atayne which transforms trash into athletic wear or App-X that specializes in web based Alternative Asset Fund Managing for non-profit organizations. As part of their mission of being a B corporation, App-X even distributes some of their online products for free. To become a Certified B corp an organization is evaluated through the 'B Impact Assessment' that provides a 'B Impact Report' taking into consideration a company's governance, workers rights, as well as environmental and community impact.  

 In a January 2012 article of The Economist, B corp proponents cite their financial flexibility as a critical asset, , "Non-profit firms and charities are needlessly restricted in their ability to raise capital when they need to grow." Benefit corporations do create profits. This allows them to act economically independent from government programs and grants.  

However, b-corps have skeptics. They claim the line between b-corps and traditional for-profit corporations is too thin. Other opponents believe the standards for evaluating benefit corporations are not clearly defined. Despite these criticisms, it seems that benefit corporations are growing in popularity and purpose. As their popularity and numbers increase, we must ask ourselves, 'What potential relationship can these businesses have with community development work?'  

One issue that is a constant worry for non-profits and community development corporations are finances. It appears as though traditional public sources of funding for CDCs are becoming increasingly scarce. CDCs must begin to look for new and innovative funding mechanisms. Formal partnerships between benefit corporations and community development corporations may have mutual benefit. One question that came into my mind, 'Can the mission of a benefit corporation help fund non profits? If so, how? If not, why not?  

In certain states, it may even be possible for a benefit corporation to actively involve themselves in community development work. There is potential for local businesses, B corps, and CDCs to create strong bonds actively shaping their local community. As a for profit entity, Benefit Corporations may have the ability to accomplish more than traditional non profits. They are not strapped to traditional nonprofit funding streams. Benefit corporations are a relatively new phenomenon in America. A lot remains to be discovered. What is clear, is that benefit corporations and their formation demonstrate a conscious effort to positively contribute to the world community. As community developers, we must stay abreast of B corps and other movements to positively change communities. Hopefully, this blog post is first of several conversations about benefit corporations and their role in community development.  

To learn more about benefit corporations, please review these links below: 

http://www.bcorporation.net/publicpolicy 

http://www.thenation.com/article/161261/rise-benefit-corporations 

http://www.economist.com/node/21542432 

The Obama Administration has appropriately placed a high priority on driving better performance in both the public and nonprofit sectors as they seek to tackle serious social and economic challenges. This includes a heightened emphasis on research, evaluation and funding “programs that work.”  All of this is certainly welcome news. Unfortunately, as part of this effort, the Administration has embraced a new idea that I fear could take us in the wrong direction.

In the FY 2012 budget, President Obama has proposed  $100 million to fund co-called Social Impact Bonds. The purpose of the Social Impact Bond is to create a new capital market that will encourage private, profit-motivated investors to fund social programs that “work.”  Essentially, an investor would front the money to pay for a particular program. If and when the program achieved the designated benchmarks, the government would pay the investor for the cost of the program plus enough to cover their risk and earn a profit. The theory is to create a market where investors can make money by investing in effective social programs.

Sounds good right? The government only pays if the program works. Taxpayer money is no longer wasted on ineffective programs. Private sector discipline and oversight is brought to bear on the nonprofit sector!    But wait! Is this really going to work? Is creating a Wall Street-like investment market the best way to strengthen nonprofit performance? Judging from the performance of Wall Street in recent years (have you read The Big Short?), one has to at least ask the question!

While I understand the appeal of this idea – and would welcome new sources of funding for high performing social programs – we need to carefully examine the implications of this approach to funding non-profit social service programs.  I see many serious questions that advocates of these bonds need to answer before tax dollars are invested.

First, Social Impact Bonds are likely to encourage functional specialization and silo-thinking. Money will flow to programs that can hit a single key benchmark so programs will be designed to do just one thing – achieve that benchmark. This will take the idea of “teaching to the test” to an entirely new level. Programs with multiple positive social impacts will be undervalued (like housing which provides economic, educational, health, public safety, and quality of life benefits) while programs with high externalities will be overvalued  just as they are in the private economy (i.e. programs that improve outcomes in some areas at the expense of others.) What makes this all the more puzzling is that in other programs, the Obama Administration is promoting comprehensive, placed based approaches that seek multiple quantitative and qualitative outcomes through multiple interventions. I don’t understand why they would support a new funding scheme that drives in the opposite direction.

Second, will these bonds discourage collaboration because this funding approach places much more emphasis on which nonprofit should “get the credit” for the “success?  If a student’s test scores improve, who should get the credit and therefore the money? The school? The tutor? The afterschool program? The social worker who helped the student deal with early life traumas? The parents? The next door neighbor who helped with math homework? The Little League that gave her an opportunity to grow and mature and have fun? The library where she did her homework and used a computer? How much time and money do we want to spend sorting through all the possible reasons and their relative impact on the child so we can sort out who gets how much money?  Does that create a collaborative culture?

A third potential problem with this approach is that it may over-estimate our ability to identify the correct metrics and to measure them correctly. Long term data is very difficult to secure and causal relationships can be very hard to discern. In our quest for market clarity, we are certain to over simplify and choose metrics that are easy to collect, count and standardize, even if they don’t tell us the full story or even an accurate story.  This is particularly true when attacking complex, systemic problems such as educational and health disparities, environmental justice, or land use development.

A fourth problem is likely to be cream skimming. Organizations will have a powerful financial incentive to cherry pick the best clients that maximize their chances for hitting performance benchmarks. Supporters say that they can guard against this, but history shows that powerful financial incentives work – they will motivate performance but they will also motivate people to “screen” clients before enrolling them in programs.  And now we will have powerful investors pushing in this direction!

Fifth, advocates say these bonds will promote innovation, but I think it is much more likely that investment dollars will flow to safe, well-known, programs. New, untested ideas, will have a very hard time attracting investors – and those who are attracted may seek returns that taxpayers cannot afford.

I also wonder whether a Bond Market can really think about long term solutions. Will investors be willing to wait 5, 10 or even 20 years to see transformative impact? Or will they only be interested in programs that can achieve benchmarks within 1 or 2 years.  And if we are looking at long term impacts, do we have the ability to measure impact and causation sufficiently well to ensure that the right programs are getting paid? And how would we control for macro economic impacts that may cloud our ability to see the impact of individual programs?

Finally, a Social Impact Bond Market will undoubtedly become a massively complicated system as investors seek to bundle investments, guard against losses, shift risk to other parties, scale up, and otherwise replicate traditional investment markets. Lawyers, accountants, advisors and intermediaries will be needed and they will all need to be paid (handsomely, no doubt.) A program designed to save taxpayer money could easily end up costing far more. Remember, this program will leverage private capital, but at the end of the day, the taxpayer must pay for all the costs plus the profit or return. There is no free lunch and if investors start to lose money the bond market will dry up very quickly.

Everyone wants to fund “what works” and no one wants to pay for programs that don’t achieve real outcomes. But the world is complicated and it does not help to pretend otherwise. Positive social outcomes are usually the result of multiple interventions, programs and causes – including some that operate at the macroeconomic level that is far beyond the scope of a single nonprofit program. And performance metrics can only capture so much. When a new playground opens it may significantly improve the quality of life for children and families nearby. But will a new playground translate into measurable and statistically significant reductions in obesity? Or increases in family incomes? Or improved educational attainment?  Probably not. Does that mean we should stop "wasting" money on playgrounds because the "don't work?"

We absolutely need to fund programs that work. But my concern is that program evaluation is too important for us to dumb it down into numerical measures that Wall Street investors can understand but don’t tell us the true story of what is happening in our communities.  Instead, we need to build capacity in the nonprofit sector to conduct robust and meaningful program evaluation and to take advantage of new information technology that can improve our understanding of program impacts.  And we need to fully fund those activities. I fully support public-private partnerships and programs that leverage private investment (MACDC has filed its own legislation designed to do just that) but we have to be very careful how we design these programs less we suffer serious unintended consequences.