Investing In Social Outcomes

Non-Profit Law blogger Gene Tagaki had a post on LinkedIn a couple weeks ago about Social Impact Bonds. These bonds are a fairly new approach to funding non-profit activities. While I think they could be a viable tool for funding the arts, I had some reservations about them as well.

The biggest difference between a social impact bond and the current practice of government entities providing grants to solve the same problem is that a private investor is involved in the process.

Here’s how that might work using social impact bonds:

  1. A government agency identifies a social problem and commits to making a payment, but only if the targeted social outcome goal is met.
  2. An investor interested in addressing the social problem makes an investment which will may result in repayment with an additional return on its investment, but only if the social outcome goal is met.
  3. A nonprofit organization is paid by the investor, delivers services to achieve the social outcome goal, and provides a report back to the other parties.

Typically, an intermediary develops the SIB, raises capital from the investor(s), selects the nonprofit service provider(s), and selects an independent assessor that will determine if the social outcome goal is met.

Among the benefits to this approach that Takagi lists are:

  • Government payments only for agreed upon social outcome results, generally shifting government funding from short-term relief to longer-term impact.
  • Greater development and use of metrics for impact assessment, which may contribute to a favorable change in the way government funding works in its selection of service providers, models of service, and evaluation criteria and protocols.
  • Investors screen nonprofit service providers for those most likely to deliver the targeted social outcome result.

The shift toward long term impact rather than short term goals would definitely be a boon for most arts organizations. But the potential for service providers to be chosen on the basis of independent analysis using different criteria can be very appealing.

Arts organizations which are well positioned in communities investors wish to impact and who specialize in providing the services desired have the potential for receiving all the funding they need to do the job rather than funding in proportion to their budget. If organizations are chosen based on effectiveness rather than prestige, smaller arts organizations may be more likely to benefit as well.

The potential downside of this approach is that because it is an investment, the desire for a return may dictate many elements of the program.

  • Diversion of more cost-efficient direct government and philanthropic funding of sure-bet programs to address social problems…
  • Investors may dictate strategies of service provision to maximize their opportunity for a high economic return on their investment instead of a high social return.
  • Funding will be restricted and likely prevent nonprofits from using such funds to build the necessary infrastructure to support new or expanded programs to achieve the social outcome result.
  • Funding for innovative and long-term strategies may be stifled by investors willing to fund only the strategies with the most proven track records of success and/or easily measured, short-term returns.

Even if your organization doesn’t participate in a Social Impact Bond program, I foresee some potential repercussions in government granting and funding taking their cues from investors. If a government entity sees that companies are investing in certain programs, they may either view it as a type of imprimatur of those programs without doing any research or developing any criteria of their own. Or the government entity may wish to curry favor or stimulate greater investment in the community by supporting investor agendas with grants and favorable rules.

Part of the process to be qualified to invest in a Broadway show is that your personal wealth be such that you can afford to lose money. That is essentially what Takagi suggests in the analysis at the end of his piece. Only true social investors who are prepared to lose money or only gain a small rate of return in order to effect a social good should be allowed to participate in the Social Impact Bond program.

I bring up the Broadway investment scheme because the same potential for damaging investor influence exists there but the agreements have been structured so that it is clear the majority of investors don’t have any say in the way the show is executed. A basic framework exists that could be applied to Social Impact Bond funding.

Can Fundraising Be Inspirational To All Involved?

Last Thursday I attended an art show opening at the shop of a wood furniture maker. The owner of the shop invited some college kids in to festoon his walls with their work which leans heavily toward graffiti.

A couple things struck me while I was there.

First, the owner of the shop sells his furniture starting at about $2500 and going up. Except for a handful of people, few attendees at the opening could likely afford to buy his work because they were mostly college students.

Likewise, the fact the artists worked in a graffiti style, the art work isn’t likely to attract the type of people who will spend $2500+ to his store while the art show is up.

Clearly, the store owner was motivated by a desire to support local artists and not by a desire to grow his customer base.

I was impressed by the work the students had put into the installation. There were a few hundred hours worth of effort invested.

What I valued more was the opportunity this offered the artists to talk about their work with people they had never met. This is an important skill for an artist to acquire and be comfortable with as they work to advance their career.

These guys were really well organized. They had prints, tshirts and stickers for sale. They also had a laptop with a slide show of their work so you could order tshirts.

On the whole, they were doing a really good job of promoting themselves with the help of this business owner.

You may take inspiration from this story or it may give you ideas for a program you can cultivate among businesses in your community.

Much about this story is exactly what occurs when a non-profit organization asks a person or business for support in some fashion.

People give, and even though the organization may offer different levels of recognition, unless the donor/sponsor is giving a major amount or your organization is a focus of social and business activity in the community, there may not really be any direct benefit to their company in the form of goodwill or increased business.

As I thought about it, I realized when it happened to someone else, it was inspiring and exciting. When you have to solicit support for yourself in order to secure fiscal stability, it is business and somewhat burdensome.

When I tell you, look at this case, the gesture this business owner made enabled these artists to hone their communication skills and promote their work, it sounds so exciting and inspirational.

Telling a donor or granting entity that their support will enable fledgling artists to improve their ability to discuss and promote their work, it doesn’t feel as exciting. Maybe because you know this is only a small part of what the money will be used for or perhaps because the solicitation doesn’t have an immediate and direct connection to the result.

I have been wonder since last Thursday if there were any way to instill more of a sense of excitement and inspiration into the solicitation process but I can’t really think of any.

The artists who showcased on Thursday got their opportunity because they met the business owner at a similar opening that occurred in December. The person who is rumored to be doing the next show met the owner in much the same way.

But by and large, no one will know you need support unless you tell them so you need to go through the solicitation process. There is a certain degree of scrutiny and follow up reporting that is involved with any significant transfer of monetary and material support.

As much time, inconvenience and effort the business owner has spent by allowing different artists to showcase in his store, the expense hasn’t been terribly large for him at this point.

The only time the process isn’t going to require bothersome and boring effort that I can see is if you happen upon a comedy movie ending where you inherit an enormous sum from an unknown admirer.

For all my doubts, I still wonder if it might be possible to make fund raising/solicitation an enjoyable experience for everyone involved. I would love it if the experience I had last Thursday was scalable so I am especially curious to learn if anyone out there has managed to design such an experience.

Donor Cultivation In The Digital Age

Last year the Wyncote Foundation released a report about how cultural institutions were using digital technology, Link, Like Share: How Cultural Institutions Are Embracing Digital Technology. The report goes into some best practices for putting digital resources and personnel at the center of your organization’s focus. This includes having the digital department drive some of the decision making.

I was pretty interested to read their section on focusing on capabilities, not projects. They noted cultural organizations need to be looking at long term capabilities and only focus on “fast-fail” experimental projects to help them achieve the long term goal of developing capabilities. This section spoke of the need for grant making to shift to supporting capabilities rather than short term projects.

What really caught my eye was their discussion of the implications that a digital orientation had on development efforts.

“Meanwhile, the legacy cultural sector in the U.S. still relies on what one of our study organizations called “the tyranny of the purchase funnel.” By that he means that the dominant logic of the sector is based on the user’s progression from awareness to sampling, then on to occasional and eventual loyal user, committed contributor and finally to the legacy bequest. This patron development pipeline is in the mind of nearly everyone at a legacy institution because it has been a proven route to revenue.

But digital is the new frontier, the Wild West. Legacy enterprises area vulnerable to new entrants who are digitally nimble, lean and responsive. It’s an unruly and unpredictable environment where major players, new and old lose major money. So why invest? And why not invest cautiously? Why risk effort that could be put toward the known and use it for the unknown?

My feeling is that while we have been talking about how arts and cultural organizations need to be innovative and nimble in the way they interact and communicate with their communities, how fund raising may need to change hasn’t been part of that conversation.

Think about how much you may have been focusing on the former while operating under the assumption that development would still be a gradual process.

The need to revise the approach to the development process has been implicit in the conversation, but never explicitly stated beyond providing ways for people to donate online and possibly needing to use services like Kickstarter as a fund raising source.

There is a lot of earned revenue oriented discussion about what changes people expect from their attendance experience, but not as much about how there may be an evolution in the method of cultivating and persuading toward greater investment in the organization.

The long arc of relationship building may no longer be viable. As cynical as it may sound, getting someone to donate as much as you can in the moment via their phone may emerge as the most successful strategy.

On the optimistic side, we are told the millennial generation wants to be involved with something they feel makes a difference so the challenge may be in finding ways to involve and engage them even more than your organization has in the past.

The issue that may emerge might be that the definition of what is meaningful may be strongly influenced by a person’s social network and shift accordingly.

For example- How many people are doing the ice bucket challenge or making donations now? How many people have become involved with supporting ALS related organizations?

I actually don’t know the answers to either of these questions. But if support has fallen off, is it due to the failure of ALS organizations to engage people or because the cause has slipped out of vogue?

The vast majority of arts and cultural organizations will likely experience fewer extremes in community involvement during the evolving digital age. But at this point, it may be difficult to know whether the fluctuations in personal investment are something wholly in your control or if it will be subject to the vagaries of popular taste.

Info You Can Use: Figuring Out True Program Cost

After reading my post yesterday about how the federal government is requiring that non-profits receive at least 10% of grant/contract funding to cover indirect costs, you may be wondering how to accurately determine direct and indirect costs for your programs.

Getting an accurate picture of program costs is not only important for making sure you get proper allocations from government funded programs, but also for working toward a larger goal of providing boards of directors, funders and the general public with an accurate picture of the true costs of programs.

Providing an accurate picture is key in the campaign to diminish the use of overhead ratio as a measure of non-profit effectiveness.

In a piece on Social Velocity, Nell Edgington, emphasizes the need to present an accurate picture of costs and “break out of the nonprofit starvation cycle

She also notes that it can help decide what programs really needs to be cut.

But don’t stop there. Turn this new knowledge about the financial impact of each of your programs into a strategic tool. Once you figure out what each individual program fully costs, you can compare the financial and social impact (how well it contributes to your mission) of each program to each other, like this in order to understand how well your entire program portfolio contributes to the money and mission of your nonprofit. Through this analysis you can determine what programs you should expand, which you should continue, and which you may need to cut.

She provides links to a rather detailed guide to determining the true costs of programs published by Bridgespan.

It isn’t an easy process. The estimated timeline in the guide is at least a month. Smaller organizations with fewer programs will take less time.

The guide discusses each stage of the process in detail, suggesting what staff roles need to be involved. It also provides some clear definitions and examples for what needs to be considered.

For instance, indirect costs:

Indirect costs can include general administration and management expenses (e.g. management staff salaries and benefits), infrastructure costs (e.g. rent and utilities, transportation, equipment depreciation, technical licenses), and other costs that are incurred for the benefit of all the programs within the organization (e.g. marketing costs, advocacy expenses).

It addresses questions about determining whether some salaries like those of the executive director and human resource personnel should be allocated across different programs or not.

(Just a note – The guide is about six years old and some of the internal links to templates and examples no longer work, but don’t be discouraged, most of them may be found in the appendix.)

Since there seems to be a slowly developing trend toward removing the stigma of overhead costs (that may evolve into a demand for a high level of transparency), nonprofits may want to start to invest in practices that will allow them to evaluate the true costs of their activities.