SIF Intermediaries: More Drops in Fewer Buckets, Please

Producing new innovations and spreading successful innovations are two quite different things.  The social sector is good at the former but not the latter.  The recently selected SIF intermediaries can help fix that if they make larger grants to fewer nonprofits.

In my book, Billions of Drops in Millions of Buckets:  Why Philanthropy Doesn’t Advance Social Progress, I argue that the primary impediment to social progress isn’t lack of innovation per se but our inability to spread -- or “diffuse” -- proven innovations.  The main reasons are (1) the fundraising process fragments donations into amounts that are too small to pay for widespread expansion, i.e., the nonprofit sector has very little “growth capital”; and (2) even if growth capital were available, most nonprofits don’t have the capacity to put it to good use. As a result, the U.S. nonprofit sector comprises nearly 2,000,000 organizations, some of which have developed demonstrably effective innovations, but almost all of which are too small (less than $1 million in revenue) to bring those innovations to more than a tiny fraction of the people who need them.

The Social Innovation Fund (SIF) is an ambitious experiment to address this structural mismatch between funding the development of better ways of helping people and funding the expansion of those better ways. The popular phrase is “scaling what works,” the idea being that lots of social entrepreneurs are already figuring out “what works” on their own, but they can’t “scale” those solutions without substantial outside support.

Not so long ago, a heated debate raged about whether SIF should spur the development of new innovations or promote the expansion of “evidence-based,” i.e., established, innovations. The Corporation for National & Community Service (CNCS) resolved the dispute in favor of expansion, a policy choice I strongly support (although there are still many who do not). As CNCS puts it, “SIF will target millions in public-private funds to expand effective solutions across three issue areas: economic opportunity, healthy futures and, youth development and school support.”  This approach echoes the sentiment expressed in the title of Wendy Kopp’s book, One Day, All Children ...

CNCS just completed its selection process of 11 “intermediary organizations” that “have strong track records of successfully identifying and growing high-performing nonprofits.”  Over the next six months, the intermediaries must conduct their own competitions to find and fund growth-ready nonprofits with proven innovations. (In some cases, intermediaries competitively pre-selected qualified nonprofits, which CNCS reviewed and approved as part of the intermediary selection process.)

The final selection of nonprofit grantees by the 11 intermediaries will be crucial to the success of SIF’s mission of scaling what works. Obviously, the intermediaries will look for well-run, growth-ready nonprofits with innovative, effective and reliable intervention models. Although that’s a high standard of eligibility that most nonprofits don’t meet, there are far more nonprofits that qualify for SIF funding than there are funds available.  Given the dire economy and fundraising market, plus lingering disappointments about the design of SIF and the selection of intermediaries, pressure will now likely shift from CNCS to the intermediary organizations to spread the final grants among as many nonprofits as possible. That would be a mistake.  

The intermediary grantees comprise a diverse mix of national, regional, state, and local organizations with a variety of structures and business models. Six of the intermediary grants are for two years and five are for one, with the amounts ranging from $2 million to $10 million and the average annual grants ranging from $1 million to $10 million. The median annual grant is $3.6 million. All told, this is a heterogeneous mix, making it hard to offer generalizations about the ideal number of final grantees or size of grants. But it would inevitably dilute SIF’s ability to accomplish mission of scaling what works to increase the number and decrease the size of final grants.

The intermediary organizations were chosen for their enlightened approaches to scaling, and the applications I’ve read are impressive, so I have considerable confidence that they will make careful choices about the final grantees. Given how rapidly SIF has been launched, though, their grantmaking parameters are still somewhat fluid. For example, CNCS reports that Foundation for a Healthy Kentucky will focus on “6-10 low-income communities,” Missouri Foundation for Health will invest in “10-20 targeted low-income communities,” New Profit will collaborate with “five to six innovative youth-focused nonprofit organizations,” and the Edna McConnell Clark Foundation will fund “up to 10 youth development organizations.”

The selected intermediaries aren’t just passive conveyors of federal dollars to local nonprofits. Not only do they have to “select, invest in, support, and monitor the replication and expansion of grantees,” they’re also required to follow best practices for competitive grantmaking, data collection, performance measurement, impact evaluation, and stewardship of federal and private funds.  Intermediaries will be held accountable for their grantees’ impact and growth, of course, but they’ll also have to show that they added much more value than the extra cost and red tape their participation required.

This last point is particularly important.  SIF adopted a three-tiered structure because it believes (as I do) that this systemic approach can make the whole much greater than the sum of the parts.  At the same time, the approach creates significant risks that would not arise if CNCS just made direct grants to growth-ready nonprofits.  Even though CNCS, the 11 intermediaries and the nonprofit subgrantees all bring unique assets to SIF, the collaboration won’t succeed unless their respective contributions can be  aligned and managed productively.  

That kind of “alignment” is a key factor in producing what Robert Kaplan and David Norton (the developers of the balanced scorecard) call “enterprise value” in both the private and public sectors. Here’s how they explain the concept in the case of companies with separately-managed business units that must work together:

“The corporate headquarters does not have customers, nor does it operate processes that make products or services.... The corporate headquarters aligns the value-creating activities of its business units -- enabling them to create more benefits to their customers or to lower total operating costs -- beyond what they could achieve by themselves if they were operating independently.”

In a similar vein, NYC Deputy Mayor Stephen Goldsmith and William Eggers have devised an ingenious approach called “governing by network” in which the public sector acts as an “integrator” of outside third-parties to accomplish objectives that government agencies couldn’t do on their own: “A public agency can use its positional authority and perceived impartiality to bring the different parties together, coordinate their activities, and resolve any disputes.”  That’s what CNCS is trying to orchestrate with SIF.

But very few organizations, whether private, public or charitable, have meaningful experience managing strategic alliances with independent organizations they don’t control.  Governing-by-network is much easier said than done:

“As more and more agencies forge partnerships with third parties, agency performance will largely depend on how well the partnerships are managed. To achieve high performance in this environment, governments will need to develop core capabilities in a host of areas where today they have scant expertise.”

Think about this in terms of SIF. CNCS has to oversee the intermediaries, and the intermediaries have to oversee their nonprofit portfolios. Collectively, the enterprise is trying to significantly increase the impact and scale of the funded social innovations.  To be deemed successful, all three layers have to manage the funding, monitor performance metrics, measure impact, and foster growth while maintaining quality, which means they have to develop and manage the tools, processes, infrastructure, and organizational capacity to carry out those functions, all of which requires dedicated funding, skilled professionals and other scarce resources. At the end of the day, CNCS will have to convince skeptics and supporters alike that the results of the experiment were worth the extra effort and expense.  

As someone who strongly believes that SIF is on the right track, I encourage the intermediaries to avoid making their job more challenging than it already is. It stands to reason that, if you’re in the business of herding cats, the fewer the better. Even one or a few more nonprofits in the portfolio will multiply the complexities of intermediation, and I suspect for the really crucial grantees, the incremental increase in funding would provide a welcome increase in their margin-for-error, one that might prove much more valuable in difficult times ahead than potentially underfunding additional recipients.  

These are only the first round of short-term SIF grants, and they could gain the public support needed for expansion if, but only if, their success is clear. Both CNCS and the intermediaries should have the courage of their convictions about SIF’s mission and go all in on scaling what works. Find the very best high-performers and give them as much growth funding as you can.