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SoCap Coverage: Nonprofit Analysis, Beyond Metrics

This is a guest post by Adin Miller, owner of Adin Miller Consulting, who is providing coverage of the Tactical Philanthropy track at the Social Capital Markets conference.  Follow him on Twitter:@adincmiller

By Adin Miller

Adin Miller The closing session for the Tactical Philanthropy track at the 2010 Social Capital Markets Conference (SOCAP10) was jokingly referred to as the Inquisition. In all honestly, it was a tremendous moment in transparency and candor and delivered on its intention to learn about three different approaches to analyzing nonprofits. Taken together or separately, the assessment approaches should help donors and social impact investors determine how a donation or investment might be applied to create positive community impact.

The session served as a forum for three major nonprofit analyst and rating agencies to report on their examination of DC Central Kitchen, a willing partner in the exercise. It featured Colette Stanzler of Social Impact Research Initiative at Root Cause, Timothy Ogden of Sona Partners representing GiveWell as a member of its Board of Directors, and Ken Berger of Charity Navigator. Michael Curtin, represented DC Central Kitchen as its CEO.

The session’s subject – moving beyond the application of simplistic metrics as rating tools for nonprofits – probably generated the most Tactical Philanthropy specific pre-conference discussions and issues. I previewed this session and some of my questions in two earlier posts (first post and second post) prior to SOCA10. The lack of demand for metrics by individual social impact investors was highlighted by Kevin Jones in a Social Edge discussion. Another pre-conference discussion hosted by Sean on Social Edge on moving beyond metrics generated 37 comments, some of which came from the panelists. In short, this is not a subject without its critics and opinions.

In introducing the session, Sean explained that he wanted to highlight how nonprofit analysis, which has focused simply on metrics and scores, is now evolving into a more holistic assessment of the whole organization.

Michael led off by presenting information about DC Central Kitchen as a social and philanthropic investment enterprise. He acknowledged the vulnerability of being under the microscope in a public setting, especially since he would be hearing the analyses for the first time. But, he also stressed the value of transparency, the ongoing need to develop more stories highlighting the organization’s effectiveness, and the importance of incorporating data to support its communication efforts.

The three rating agencies then presented their analysis. Without getting into the minutia of each analysis, which will be available in some form in the future (GiveWell, for instance, will publish its entire report on DC Central Kitchen online), I’d summarize their assessments as a split decision. All of the agencies identified DC Central Kitchen as amongst the top programs in providing employment assistance. But only Root Cause and Charity Navigator recommended the organization as investment for donors and social impact investors that would create positive community impact.

In presenting the Root Cause analysis, Collette concluded that DC Central Kitchen was a very impressive organization and offered real investment opportunity. The analysis, which focused on organizational health, program performance, and social and economic outcomes, identified DC Central Kitchen as having strong financial health, a solid management team, and demonstrated results.

Likewise, the Charity Navigator analysis concluded that DC Central Kitchen was a strong organization worthy of additional donations and investments. The analysis applied the new Charity Navigator analysis model that will officially launch in July 2012. That model rates organizations on their effectiveness and results (50%), accountability and transparency (17%), and financial health (33%). The effectiveness and results segment demonstrated Charity Navigator’s movement to link outcome performance with its assessments. The financial health segment include an analysis of an organization’s efficiency and sustainability; it includes overhead ratios as a criteria, but that now only accounts for 10% of overall score.

Under the existing Charity Navigator model, DC Central Kitchen only garners two stars, an average score for nonprofits. Under the new analysis model field tested for the session, the organization earned a complete different rating of four stars and a total score of 82 out of possible 100 points. Specifically, it earned 41 out of 50 points for effectiveness and results, 14 out of 17 points for accountability and transparency, and 27 out of 33 points for financial health.

The somewhat dissenting review came from GiveWell. Channeling Holden Karnofsky, who founded GiveWell in 2006, Timothy highlighted how GiveWell conducts its analysis which includes a rigorous process that involves independent research and review, an examination of a nonprofit’s website, open-ended conversation, and follow-up for more information. GiveWell’s analysis asks several key questions focused on documenting evidence of a nonprofit’s impact, assessing what a person gets for a donation, and determining if there is room for more funding and evidence for scaling growth options.

The GiveWell analysis focused on the job training component at DC Central Kitchen. It concluded that there is not yet compelling evidence that DC Central Kitchen has impact over and above other organizations and efforts in the same space. Nor did the analysis clearly identify how additional funds could scale up the organization. As a general approach GiveWell attempts to determine what other options beyond donating to a specific nonprofit does a donor have that will generate the best impact. In its analysis of DC Central Kitchen, it concludes that it does represent a top program in the employment assistance arena. But, the organization may not be as compelling as a means for a donor to create significant impact.

In taking a few days to mull over this session, I’m still struck by how much the tenor of the discussion of nonprofit ratings has moved beyond simple metrics. While each of the rating agencies admitted that it could have used a bit more time to conduct its analysis, the information presented does appear to be fairly substantial. Each rating agency also presented its findings while noting its philosophical biases on what makes for an effective nonprofit and potential recipient of donations and investments. And while the session did not address my fundamental concerns about applying a retrospective analysis in order to justify prospective funding, it was fascinating nonetheless.

Several issues still need to be addressed as we look to continue to move away from applying simple metrics in assessing nonprofits. For example, the assessments represent a snapshot of the organization at a specific moment in time. And the assessments vary in cost: for Root Cause and GiveWell, those assessments are not inexpensive; Ken did state an in-depth analysis from Charity Navigator only costs $250. With the possible exception of Charity Navigator’s new model, real-time and ongoing updates to an organization’s assessment may present challenges to the rating agencies.

The assessments also do not represent simple approaches that might appeal to the general donor population. As noted Behavior Finance session, while 85% of the respondents in “Money for Good” report (PDF) care about nonprofit performance, only 32% conducted research on a charity prior to giving and only 3% would use comparative data to make decisions on where to donate.

The analytical approaches may also require additional adjustments for organizations that are not providing direct services, such as advocacy organizations or animal welfare organizations (where it would be difficult to interview direct service recipients).

The assessment approaches will also need to reconcile their difference with social impact benchmark systems such as IRIS and GIIRS. The panel’s response to an audience question on integrating their assessment systems with IRIS and GIIRS left many of us concerned (see Nell Edgington’s post on Socap Day 2; it was also a point raised through Twitter after the presentation). GiveWell remains pretty skeptical of social return on investment benchmarks and metric systems like IRIS and GIIRS and Ken wasn’t familiar with the system but generally supportive of the concept of integrating data resources. Only Colette offered support for using standard indicators across fields such as IRIS and GIIRS that would be applicable to their assessment work.

Nell’s point that “the philanthropic and impact investing worlds aren’t communicating and collaborating” needs to be addressed as we move to improve assessment tools of nonprofits. A convergence is taking place in measuring the impact of the social investment marketplace in response to “the need for coherent and "harmonized" social and environmental performance system” (see Elly S. Brown’s wonderful post on the Harmonizing Tools to Measure Impact session). We need to keep pushing for analytical tools that can bridge both charitable giving and social impact investment opportunities. Ultimately, we all want evidence to know what works and where to best allocate donations and social impact investments. This session reveals that we’re moving in the right direction, but we still have work to do in this area.

Nonprofit Analysis: Beyond Metrics

This is part six of a six part series exploring the sessions in the Tactical Philanthropy track at the Social Capital Markets conference.

Session Description: Nonprofit Analysis: Beyond Metrics
Over the last few years, mainstream nonprofit analysts and rating groups have moved beyond simplistic metrics like the "overhead expense ratio." Join three of these groups, Root Cause, GiveWell and Charity Navigator as they present their analysis of DC Central Kitchen, a prominent job training and meal distribution nonprofit. You’ll hear three robust approaches to analyzing nonprofits as a way to determine the degree to which a social investment in the organization may lead to impact.

  • Ken Berger, Charity Navigator
  • Andrew Wolk, Root Cause
  • Elie Hassenfeld, GiveWell
  • Michael Curtin, DC Central Kitchen

One of the worst habits of “new” philanthropy is to import simplistic versions of business practices to the nonprofit sector. One of the places we see this habit is in the idea that we need to build some sort of unified ranking system to judge nonprofits. While the idea that we can somehow score nonprofit effectiveness on a simple scale is appealing, it is a dangerous simplification of an important idea.

In the for-profit world, the urge to create simple systems to do things like pick stocks runs deep. But these systems are understood to be of little value or sometimes outright scams. The truly great investors use robust systems that evaluate investment opportunities across a variety of qualitative and quantitative areas.

So I’ve been thrilled to watch nonprofit evaluation groups move beyond simplistic measures and embrace the complexity, human judgment and uncertainty that is at the heart of understanding whether a nonprofit is good at what it does.

For this session at SoCap, DC Central Kitchen, the nonprofit founded by Robert Egger, has agreed to open themselves to evaluation by Charity Navigator (using their new methodology), Root Cause and GiveWell. At SoCap, each group will offer their evaluation of DCCK with the organization’s CEO Michael Curtin in the room to offer his own views.

Our hope for this session is that it will help demonstrate that there are multiple, valid approaches to evaluating a nonprofit. Kudos to DC Central Kitchen for being willing to open themselves to outside evaluation and engage in this process.

You’ll find more information about DC Central Kitchen’s commitment to transparency and achieving impact here.

The Tyranny of Metrics

Reader Jeane Goforth writes:

Evaluation. My co-founder and I spent 2 hours standing on a street corner ‘after’ work discussing how to measure and convey the profound experiences we have daily. My stomach churns and my shoulders ache when our expert non-profit adviser talks about metrics. I struggle to add one more thing to my to-do list and I know metrics don’t say enough about why what we’re doing works and why it is important.

To me, this comment sums up everything that is wrong with metrics, both how they are dismissed by detractors and how they are misapplied by advocates.

Bad metrics are “one more things to my to-do list”. If the metrics don’t help the nonprofit run their organization better, than their relevance should be questioned. At Ensemble Capital we track a number of metrics about the performance of the firm. We don’t do this to show them to anyone else, we do it because they help us understand our organization better. But we also know that the metrics that are trackable do not capture everything (or even most) about our business.

One of the most important events in Ensemble’s history (in my mind) was when I was making a presentation to the CEO of a public company about why he should consider opening a private foundation. Half way through the conversation he cut me off and said, “Let’s do it. This makes all the sense in the world. A couple of years ago I asked my CPA if I should have a foundation and he gave me one answer. Then I asked my lawyer and he gave me another answer. But clearly you understand the reasons that I personally need a foundation, so let’s get one started today.” This individual had access to some of the best advisors around. Yet they failed him when it came to philanthropy. That was when I knew Ensemble was going to be a success. But that statement doesn’t show up in any metrics that we track.

Every nonprofit should be searching for relevant metrics to track that can help them run their business. If you don’t realize that total donations are going up only because two large donors have significantly increased their giving, then you will not see the increasing risk to your budget of losing those two donors. If you are working with high school students to help them get into college and the rate at which students are going to college is not budging, you have some examination of your program to do (although it doesn’t mean by itself that you’re failing).

But metrics that do not help the nonprofit are probably useless to donors. If a donor asks for a metric that you do not think is relevant, it is either because you are mismanaging your organization, or far more likely, the donor does not really understand what you do.

Quantifying “doing good” is tough if not impossible. But the idea that nonprofits don’t have time on their to do list to think about whether they are doing a good job is poison. Anyone running a for-profit or nonprofit organization should be thinking everyday about how they can do better and what tools can help them understand their organization. If “tracking metrics” is something that is just busy work, then it is useless work.

Albert Ruesga on Metrics Mania

Albert Ruesga, who blogs at White Courtesy Telephone, was a panel member at the recent Metrics Mania debate at the Bradley Center for Philanthropy & Civic Renewal. Albert posted the text of his comments today and they are outstanding.

At a time when we are seeing a growing backlashing against “philanthrocapitalism”, it is interesting to look at what is being grouped under that term. For many people, “metrics” and the push for more “evaluation” of philanthropy is an unwelcome element of a “business-like” approach to giving. I believe that evaluating nonprofits and philanthropy in general is necessary for a the Third Sector to become a high-performing, high-impact driver of social good. But as I wrote last week, I think that much “evaluation” takes a scientific approach to measurement that is borrowed from the hard sciences, while the lessons of the liberal arts (under which investing and financial markets should be categorized) are more appropriate.

Albert, I think, would agree. He writes:

Measurement and evaluation, when done properly, are not just a bit of value-added for philanthropic or nonprofit work, they’re absolutely essential. Only a fool would disagree with that proposition.

But here I mean not just the kinds of formal evaluations described by Gary Walker in his essay, but informal evaluation as well: the kinds of course corrections we naturally make when we embark on a project, take a false step, and adjust what we do accordingly. Evaluation is not and should not be the sole province of the highly compensated consultant. We evaluate all the time; our own eyes and ears notice things the most astute consultant will never notice; and we’ll often be our own worst critics.

Now here’s where the metrics schmetrics comes in, perhaps: More nonsense has been spoken and written about evaluation than about any other subject in philanthropy. The number of people practicing evaluation without a license and without a proper scientific and philosophical grounding in the subject is, in my view, a scandal. Worries about evaluation, engendered in part by logic models the length of whale intestines, have become the math anxiety of the philanthropic world…

…I want to make clear that I’m not in the least anti-evaluation. As I’ve written elsewhere, I’m concerned that we tend to seek a kind of scientific or moral certainty from a formal evaluation where none exists. The questions that funders most often bring to an evaluator—Was this program worth our $25,000 investment? Should we continue funding it?—are questions only they, the funders, can answer. Say we measure a 25 percent drop in the truancy rate for a hundred kids in some program, and a 25 percent increase in their test scores. Is that worth $25,000 to you? Each donor needs to answer that question for him- or herself. As donors we will never be absolved of our responsibility to use our good judgment.

“Evaluation… the math anxiety of the philanthropic world.” What a great line. Evaluating nonprofits and social good in general is not about math. When I advocate for a financial markets-type approach to evaluation, I am not calling for number crunching. I wrote about this concept in January and will repost my comments from then rather than repeating myself:

Economics is often called the “dismal science”. I know that many people think that finance is boring. But the vision of financial markets as nothing but numbers and spreadsheets does not capture the reality. Do investors buy stock in Apple because they spent hours and hours processing spreadsheet calculations? No. While at the end of the day, buyers of Apple stock believe that the return on capital being generated by the company will make for a profitable investment, the information they use to determine that are not just numbers. The way in which Apple has captured the imagination of the consumer, (an intangible piece of data that cannot be added to a spreadsheet) is by far the most valuable asset that Apple has and it is a major reason why investors have flocked to the stock.

Have you ever watched CNBC, the news channel of the financial markets? It is far from some kind of spreadsheet crunching lecture. Every day, investors or all types come on the show and make passionate arguments for why certain companies are good investments. While numbers and calculations underlie much of their thinking, it is the story, the human story of the companies they discuss that take center stage.

Warren Buffet is widely considered the best for-profit investor of his generation. Does he sit in a corner office reading a spreadsheet the way that Phil suggests? The quote below is from noted investor Whitney Tilson (Tilson is a huge fan of Buffet and a fellow columnist of mine at the Financial Times):

If the future were predictable with any degree of precision, then valuation would be easy. But the future is inherently unpredictable, so valuation is hard — and it’s ambiguous. Good thinking about valuation is less about plugging numbers into a spreadsheet than weighing many competing factors and determining probabilities. It’s neither art nor science — it’s roughly equal amounts of both.

The lack of precision around valuation makes a lot of people uncomfortable. To deal with this discomfort, some people wrap themselves in the security blanket of complex discounted cash flow analyses. My view of these things is best summarized by this brief exchange at the 1996 Berkshire Hathaway annual meeting:

Charlie Munger (Berkshire Hathaway’s vice chairman) said, “Warren talks about these discounted cash flows. I’ve never seen him do one.”

“It’s true,” replied Buffett. “If (the value of a company) doesn’t just scream out at you, it’s too close.”

Taking liberties with Tilson’s quote, I would argue that donors should not “wrap themselves in the security blanket of metrics” because “the lack of precision around measuring the impact that nonprofits achieve makes them uncomfortable.”

World-class investors do not sit in their office crunching spreadsheets all day. Neither should world-class donors. But the underlying logic of both should be that of achieving the highest return on investment.

Robust Intermediaries Key to Social Impact Bond Success

This is a guest post by Steve Goldberg. Steve leads Social Finance’s Social Impact Bond development, and is author of Billions of Drops in Millions of Buckets: Why Philanthropy Doesn’t Advance Social Progress.

By Steve Goldberg

Goldberg PhotoSocial Impact Bonds (SIBs) have the potential to help accelerate the social capital markets in many different ways. Rather than viewing them in isolation, it is important that we recognize the way in which they may catalyze the impact investing movement and bring other forms of private capital to the table. But considerable work must be done to create the conditions to attract, retain and grow these kinds of funding.

SIBs are an innovative addition to the impact investor toolkit. SIBs raise funds from private investors, which are then used as working capital by nonprofit organizations providing prevention programs that can reduce the need for costly government remediation and safety net responses, such as emergency shelters and incarceration. If an independent evaluator determines that the nonprofit programs have lowered the demand for government services beyond a predefined metric, the government repays investors their principal plus a rate of return; otherwise, investors lose their capital.

From a financial perspective, SIBs differ greatly from the conventional mechanisms for funding social services. Private investment offers possibilities that are both more muscular and more complex. Although various kinds of impact investing have been around for decades, there is a consensus among analysts that the field is “now emerging from infancy” and “stands poised to become a powerful vehicle…to address significant social and environmental issues” (see Investing for Impact: Case Studies Across Asset Classes).

However, it is by no means a foregone conclusion that impact investing will realize its potential, which has been estimated in the hundreds of billions of dollars. Although the idea of using profit-seeking investment to generate social and environmental good is moving from a periphery of activist investors to the mainstream, a host of challenges must be overcome to bring the new industry to life.

For instance, to attract capital, SIBs must offer both a compelling investment thesis—how the investment will generate financial returns and increase social impact—and a rigorous business case that convinces prudent investors that it’s safe to take the plunge. While a sizable and motivated group of prospective impact investors finds the SIB investment thesis—that cost-effective nonprofit preventive programs can reduce governmental expenditures, yielding savings to fund returns to investors—plausible and attractive, the investors for the first round of SIB pilots will likely be foundations and charitable trusts of high-net-worth individuals, who are willing to test the concept.

Developing detailed business cases for specific SIBs will be challenging, given the inherent uncertainties involved in producing and measuring social outcomes. Social Finance has been conducting extensive research on various evidence-based interventions, growth-ready nonprofits with strong track records of successful delivery, and the costs and outcomes of existing and proposed services, all of which must be presented in credible financial models. We know that investors will conduct demanding due diligence, as well.

The intensive focus on outcomes imposes stringent requirements for defining metrics, establishing target outcomes, collecting data, and evaluating results. The government’s obligation to repay investors, the amounts due and their timing will be contingent on the results of an independent evaluation, so clear definitions of desired outcomes and unambiguous numerical measures and targets must be set up front. A robust data collection system must be developed and faithfully maintained. The entire system must provide real-time data that can guide and track ongoing operations and provide oversight capability to inform mid-course adjustments, as necessary.

The key to overcoming all of these barriers and weaving together the many players that are needed to make SIBs work are robust intermediaries. SIB intermediaries will need to serve as specialists with expertise in finding effective intervention models, conducting due diligence on nonprofits, organizing public-private-nonprofit partnerships, structuring transactions, raising capital, and managing the whole complex project. Intermediaries must also convince investors that the outcomes can be produced and measured; government agencies that prevention programs can deliver savings; and nonprofits that SIBs can attract long-term growth capital necessary for scaling.

SIBs represent a significant step forward in building the impact investing industry. Its potential has yet to be demonstrated in the United States, but with careful attention to the challenges outlined above, it is poised to catalyze private capital toward advancing social good.

Preparing Nonprofits for Social Impact Bonds

This is a guest post by Bill Pinakiewicz, the Director of the New England Program for the Nonprofit Finance Fund (NFF). Bill is a senior member of the NFF team that has been engaged by the Rockefeller Foundation to assess the feasibility of using the Social Impact Bond and other Pay for Success approaches in the U.S. social sector.

By Bill Pinakiewicz

Bill PinakiewiczSocial Impact Bonds (SIB) and Pay-for-Success (PFS) financing structures have generated considerable “buzz”. In part, this is about the promise PFS and SIB have for changing the way we think about the funding of social programs. SIB and PFS have the potential to provide supplemental, sustainable private capital to fund social programs that work. As government at all levels continues to cut budgets for social programs, the potential for a new source of capital is alluring, and who can argue with the wisdom of funding what works?

Once launched, the success of a PFS or SIB rests squarely on the performance of service providers. They must deliver programs that achieve the positive social outcome metrics specified in contracts with governmental payers in order to release payments to private investors. If service providers fail to hit these metrics, there are predictable consequences. Individuals, families and communities involved in the programs fail to receive promised improvements. Private investors incur losses. Reputations suffer.

It’s surprising then that the public dialog on PFS and SIB to date has focused so little on engaging service providers. Contrast this with the extensive analysis of the incentives and requirements for engaging governments and private investors that has dominated the public dialog during this same time. Certainly, engaging government and private investors is necessary for launching PFS and SIB in the U.S. However, given the key role service providers will play in successful execution, a comparable focus on their capacity requirements and readiness issues is required for PFS and SIB to take root in the U.S. with meaningful systemic impact.

Service providers require a more engaged and influential presence in this public dialog in order for PFS and SIB to be implemented with systemic impact in the U.S. The field needs to identify the opportunities, challenges, risks and capacity requirements that will enable a broad pool of service providers to participate in PFS and SIB. Opportunities for incubation should be developed to prepare the service provider community to be PFS and SIB ready, even if they never actually participate in one.

The reason for this is that the truly disruptive aspect of PFS and SIB is the potential they have to change the way we think about how social programs are delivered. PFS and SIB promise to accelerate an inexorable shift in the social sector from a focus on “outputs” to a focus on “outcomes” in defining and measuring the success of service providers and the programs they deliver to society’s most vulnerable individuals, families and communities. With the possibility of PFS and SIB, the days of the focus on “outputs” (we served 500 individuals in our recidivism reduction program) are numbered. The days of a focus on “outcomes” (we reduced recidivism by 15% among individuals involved in our program) have arrived.

This is not as radical as it may seem. Persistent budget pressures are compelling governments and philanthropies to deliver more measurable positive outcomes for every dollar they “invest” in social programs just to maintain current levels of impact, especially given the magnitude to which need has increased. When allocating funds and evaluating programs, government and philanthropies in increasing numbers are already requiring service providers to set and meet outcome metric targets.

All of this presents an opportunity for the social sector to build an enabling environment to support the identification, growth and proliferation of high-performing service providers that deliver programs that work. First, let’s continue disciplined due diligence to find service providers who are ready now to participate in PFS and SIB. Nothing will galvanize the movement toward outcomes and what works in the sector more than successful proof-of-concept PFS and SIB transactions. Second, invest also in the incubation of PFS and SIB capacities and expertise among service providers who are not yet ready. Preparing a pipeline of service providers ready for PFS and SIB is needed both to reach the critical mass required for PFS and SIB to have meaningful systemic impact and to equip providers for the pervasive focus on outcomes that is all too certain to come.

Jed Emerson on Impact Investing

This is a guest post by Jed Emerson, an executive at ImpactAssets, Senior Advisor with the Sterling Group (Hong Kong) and a senior fellow with the Center for Social Investing at Heidelberg University. His book, Impact Investing: Transforming How We Make Money While Making a Difference, was co-authored with Antony Bugg-Levine of the Rockefeller Foundation and comes out the first week of September.

By Jed Emerson

Jed EmersonIt seems I can’t move my feet without stumbling on the “I” word…

“Impact” is everywhere and clearly the modifier of the moment: Impact Investing, Impact Entrepreneur, Impact Evaluation, Impact Bonds, Impact exchanges, consultants, markets and more…

Falling fast upon my sword, I am as bad as anyone.

I love the insights of an impact orientation! I’ve co-authored a book called Impact Investing coming out in September, am an active strategic advisor to two families pursuing the creation of impact portfolios and accepted the opportunity to devote a good chunk of the rest of my time to being part of the management team for a new, nonprofit financial services firm called—wait for it!—ImpactAssets!

Clearly, the latest buzz is about impact and who wouldn’t like that? I mean, after all, who would launch a strategy with a focus upon being ineffectual?  Incompetent Investing just doesn’t have the same ring to it as Impact Investing. We want to do more than simply earn a financial return — we want to actually change the world and so, for better and in some ways worse, the word of the day is:  Impact!

The emergence of this idea and its integration with various existing strategies and approaches has raised a host of questions and issues, ranging from how impact investing complements socially responsible and sustainable investing, to how one manages for impact, to how best to assess, measure and describe “impact” outcomes—and beyond.

While these are exciting times, there are indeed moments when our conversations and work can feel like we’re experiencing a collective “Ground Hog Day” moment. “Haven’t we been here before?” ask those involved in community development finance and traditional socially responsible investing? “Isn’t this simply a distinction without a difference?”  This is all understandable and while there are definitely answers (or at least ways to think about!) to the various questions and challenges raised by Impact Investing (thus, the book…), if we simply focus upon each individual question and related discussion, we risk missing a much larger opportunity by keeping ourselves at that level of inquiry.

Here’s the point:

We are on the verge of a global capital convergence, a coming together of parts into what promises to be a new, more powerful Whole. If we each allow our commitment to our particular part—to our individual collective wherein we have our shared ideas, friends, funds and strategies—to be our sole focus, we may well miss out on the opportunity to leverage the whole thing—all of it—impact investing, sustainable finance, SRI, responsible investing, community investing, micro-finance, strategic philanthropy, sustainable private equity, fixed income social bonds and notes…the whole damn thing—we run the risk of missing the opportunity to catapult our work from the level of our individual collective to that of a new, shared capital commons.

Let us not forget that our focus should not be placed upon the parts. Rather, it should be locked upon the horizon wherein those parts may morph into a new whole, for what we should be concerned with is our potential for maximizing our total value.

I totally get the discussion and disagreements that have recently taken place in blogs, conferences and various forums. Where you stand depends upon where you sit, so its natural folks sitting in different positions relative to the emergent “whole” will have different — and sometimes conflicting — perspectives and priorities for what “we” should do or for how we understand the relative contributions of different parts of our capital community.

That said, if we each spend our energy simply polishing our own star we risk missing the chance to rise up and  cultivate a vision of the common constellation of which we are a part, much less the universe within which that capital commons rests. Words matter; history is what got us here and our visions are what will move us forward yet again. Over more than two decades I’ve had the pleasure of working with many others to help frame our thinking about social entrepreneurship, venture philanthropy, sustainability, performance metrics, the nature of value and god knows what else. I am now focused on understanding more of the phenomenon that has been unleashed under the banner of impact investing.

I am loving our discussions and debates, each of which help us understand and see the deeper colors of the light spectrum we are all a part of. But as we discuss and dive into ever deeper understandings of our shared efforts let’s remember to affirm the capital connections we have across the constellation; as we polish our star let’s not forget we are part of a greater, larger capital spectrum that, when viewed together, promises to shed real light on how we may best advance into the future—together!

External Accountability in Philanthropy

It takes self-discipline to stick to a workout schedule and get in shape. However, research shows that one of the best ways to stick to your plan is to voluntarily create external accountability by getting a “workout buddy” to go to the gym with you. While both of you might feel like skipping the gym on any given day, the worry about letting down your “buddy” gets each of you to go.

Foundations have the gift of being essentially free from external accountability. Just as I think that each individual should have personal control over their own health, I think that each foundation should have control over their own actions. But that still leads open the possibility that foundations might choose to voluntarily subject themselves to external accountability as a tactic to achieve better results.

Deciding to post Grantee Perception Reports from the Center for Effective Philanthropy is one way that foundations are already doing this. It seems to me that another way they could utilize external accountability would be to announce at the beginning of a new program what their metrics for success are and then commit to a schedule of progress reports.

Some major foundations have already begun to share the results of their programs with the public. But generally these reports are released as a retrospective. It would be far more useful to helping the foundation achieve results if they released information at the beginning of a new program. In our workout analogy, simply telling people after you’ve been working out for awhile how you’re doing wouldn’t be very effective. The key is making a commitment to an external party in order to voluntarily put pressure on yourself to follow though.

In a recent post on the GiveWell Blog, Holden Karnofsky highlighted a nonprofit called GiveDirectly that intends to make cash transfer payments to very poor people in Kenya instead of providing social services. Holden highlighted the fact that GiveDirectly is subjecting their work to a randomized controlled study at the very beginning of their program and noted that they’ve “pre-announced” the design of the study.

Holden wrote:

“Our #1 suggestion for making social science research more credible is to “pre-register it,” i.e., announce in advance what data will be collected and how it is intended to be analyzed, so that the final result can be compared with the initial plan and a reader can form their view of whether the results are an artifact of publication bias. We made this case to GiveDirectly and it sent us (see below) a template for the full survey it will be using and a plan for analyzing the data. Now that we have seen these and posted them publicly, GiveDirectly won’t be able to cherry-pick results in the same way that we suspect many studies do. (Of course it will still be possible for the researchers to perform different analysis than they had originally planned; but they won’t be able to sweep any unfavorable conclusions of their analysis under the rug.)”

I think foundations should be free to run their programs in any way they like within the bounds of the law. But for foundations that strive to be effective in their giving, some sort of “pre-registration” of new programs could be very helpful in keeping them focused and motivated.

Self-discipline is critical for success in every domain of human endeavors. But self-discipline is hard. One savvy way to stay on track towards the results you seek is to voluntarily create systems that maintain pressure on you to perform. We all face moments when we’re tired and can’t keep up. Or moments of judgment when we need to grade ourselves but go too easy and choose not to face hard facts. Creating a system of external accountability can help us accomplish our goals, whether those goals are getting in shape or running effective philanthropic programs.

Rigor & Moral Clarity in Philanthropy

MoralsIn a speech last fall, outgoing president of the Atlantic Philanthropies Gara LaMarche spoke about “reclaiming the moral life of philanthropy”. In his speech, he discusses the need for a re-invigoration of moral discourse, especially within the effective philanthropy movement.

After discussing the rise of evidence-based philanthropy and noting his own foundation’s support of the effectiveness movement, LaMarche said:

 

“At times it seems to me as if this movement has strayed too far from why anyone should be concerned about effectiveness at all, from passion about the deep and tenacious societal inequities that move anyone to philanthropy in the first place…

The effectiveness movement is now finding, I believe, that there is no real constituency for effectiveness as such… because it is values that move people to enthusiasm and action, not more sterile concepts of metrics and results.

…I have come to believe we need to re-invigorate our moral discourse.”

I only just read the speech today and was struck by LaMarche’s point ringing so true to me in the wake of my recent post about the practice of effective philanthropy being at its core a process of “learning how to love”.

The effectiveness movement is driven mostly, I think, by people who care deeply about creating a better world, who have deep moral beliefs, but who reject the idea that morality is unconnected to facts. While many people may hold beliefs about, for example, the best way to educate the citizens of a nation, the effectiveness movement contends that those beliefs should be connected to evidence about what actually works and stands ready to change their beliefs should new evidence emerge.

This readiness to switch their beliefs about means, does not imply a weak set of beliefs about ends. LaMarche argues that the badge of moral clarity must not be ceded to those who hold tight to their beliefs about means – whom LaMarche criticizes for a holding a “don’t-confuse-me-with-the-facts” attitude (while LaMarche speaks about this issue with a heavy political hand, I think the point is true regardless of your political leanings).

In Mario Morino’s book Leap of Reason, a core example of the effective philanthropy movement’s point of view, he warns that metrics must never trump mission and urges the reader to always ask the question “To what end?”.

It is through Mario’s question that I think rigor and moral clarity can be reconciled in philanthropy. The effective philanthropy movement should be animated by strong moral clarity about ends, about creating a just and meaningful world. But the movement is right to reject the idea that there should be a moral basis to means, that the question of how we create the world we want should be based on pre-conceived beliefs about how we wish the world worked rather than on an evidence-based understanding of how the world actually does work.

Mario Morino on “Underperformance in Philanthropy” Debate

My column about Leap of Reason, Give Smart and idea that “underperformance is the natural state of philanthropy” set off a debate among readers. Both Mario Morino, the author of Leap of Reason and Tom Tierney, the author of Give Smart, weighed in with comments that I want to highlight here.

By Mario Morino

Although this is Sean’s blog, I wanted to interject myself to offer a quick note of thanks to those who took the time to post in response to Sean’s column. I’m in agreement with most of the comments I read.

For example, I agree with Prentice Zinn that all different types of orgs—nonprofit, for-profit, and public alike–struggle with performance. However, in my experience, the concept of “performance management” is more widely understood and accepted—if not always practiced—in the for-profit sector than in the nonprofit and government sectors.

I also agree with Zinn’s comment that “a high performing organization defined by that narrow set of indicators, metrics, market forces, etc., can still pollute the planet, violate the laws of the land, disrupt economies, and pillage the commons.” If you take a look at Leap of Reason, you’ll see that we spend a lot of ink decrying the many ways in which narrow metrics have been elevated above mission. Here’s one snippet:

“I’ve witnessed some misguided efforts—often foisted on nonprofits by funders—that have produced unintended negative consequences that go beyond the waste of money. In these cases, funders have turned assessment into an exercise focused on cold numbers … rather than using it to help nonprofit leaders achieve lasting impact for those they serve.”

But this is not a reason to give up on collecting relevant data. Mission and metrics are not mutually exclusive. In Leap of Reason, we include a number of good examples of nonprofit leaders who illustrate that being information-based is fully compatible with being mission-driven.

Similarly, Christine Egger is right when she points out that leaders need to be accountable to “those they serve.” I think this is an outstanding point. To me, ensuring that we’re truly helping those we serve is truly THE NUMBER ONE reason for investing in performance management. In the book, we highlight both organizations that are doing an exemplary job of collecting and using information to improve the lives of those they serve as well as counterexamples in which nonprofits settle for mediocrity or cause potential harm to those who have given their trust.

I appreciate the discussion that has begun and look forward to continued dialogue.