Giving meaning to “scale” and making progress to its achievement
[Published originally in SIB Trib No. 3. Of course, I don't speak for any of the organizations mentioned below.]
“Scale” just might be the most reviled buzzword in the social sector lexicon. An innocent victim of indiscriminate usage, scale has come to mean both everything and nothing, something that is desperately needed and hopelessly unattainable. Virtually every visionary social entrepreneur ardently hopes his or her program will scale, while every level-headed executive director knows the safe answer to the question, “When will your program reach scale?” is, “At least twenty years from now.”
We’ve got to stop thinking of scale as something abstract and diaphanous. If we continue to view scale as akin to chasing smoke, it will never be achieved. Scale refers to something specific and important that can be measured and assessed. If we set a proper benchmark, we can devise an approach that is fit for that purpose, and we can tell whether we’re on course within five to ten years’ time.
While it remains to be seen whether meaningful scale can really be achieved within such a time horizon, I’m convinced not only that it can, but that the time to try has definitely arrived. Herewith, some thoughts on how to get started, an approach I’m calling “scale finance.”
OUR GLASS IS LESS THAN 5% FULL
After more than two decades of development, it is fair to say that the once-disputed experiment known as “social entrepreneurship” has proved the skeptics wrong. Social entrepreneurship has amply demonstrated its ability to produce innovative solutions to crippling social problems that have transformative potential. Thanks to the sustained efforts of venture philanthropists and their grantees, we now know — albeit at varying levels of confidence — how to dependably prevent or materially reduce such long-standing social problems as premature births and problem pregnancies, child abuse and neglect, lagging early educational progress, acute asthma attacks, unnecessary and protracted foster care placements, high-school truancy, youth disengagement, juvenile incarceration, prisoner recidivism, and chronic homelessness.
This may come as something of a surprise, however, since every one of those problems remains as pervasive as ever. As I lay out in my book, even the most effective social innovations have not become available to more than a very small portion of the people who need them. Effective programs don’t scale and, generally speaking, scaled (governmental) programs aren’t nearly as effective as we’d like. So while we know how to produce social innovations that “work,” we certainly don’t know how to “scale what works” to produce systemic change.
All sides of the political spectrum are frustrated by our inability to scale. EARN’s Ben Mangan complains in the Stanford Social Innovation Review about “rationalized mediocrity” and “stifling incrementalism” that allow nonprofits to “declare success despite the fact that our impact is embarrassingly small compared to the size of the problems we are trying to solve.”
Over at Bloomberg.com, Charles Murray of the American Enterprise Institute responds soberly to President Obama’s call for universal “high-quality preschool” with this hard truth: “As of 2013, no one knows how to use government programs to provide large numbers of small children who are not flourishing with what they need. It’s not a matter of money. We just don’t know how.”
For all the tremendous progress social entrepreneurship has made, we still find ourselves at the very lowest end of the adoption curve. I can’t find an effective social innovation developed in the last two or three decades that’s available to more than 5% of the eligible population. And, with very few exceptions, almost none of the exemplary nonprofits that have developed these effective programs have realistic plans for “crossing the chasm” and reaching even 20% of the total need.
When we treat scale as a moving target that’s always receding over the horizon, we can’t devise realistic ways of getting there. So what’s an achievable definition of scale, and how can social investment help us pursue it in a deliberate way?
“SCALE” IS THE PROGRESSIVE DISSEMINATION OF SOCIAL INNOVATION FOR SYSTEMIC TRANSFORMATION
“Scaling” is the explicit and active pursuit of systemic social change. It comprises a set of activities designed to eliminate the gap between the demand for and the supply of effective social programs. It has two essential elements, both of which are expressed in relative terms: size and time.
By themselves, efforts to merely “grow,” “expand” or “replicate” programs are not scaling, unless the success of those efforts is measured against the total need. If you’re trying, for example, to double in size or grow by 20% a year, that’s not scaling, unless the explicit target is to get as close to 100% as humanly possible within a reasonable period of time.
Once we adopt that (more or less) objective benchmark, it becomes possible to develop and assess scaling strategies. If your goal is to gain substantially universal adoption, then strategies like “creating a movement,” “government takeover,” “reaching a tipping point,” and “going viral” can’t work because they can’t be measured or assessed relative to an essentially fixed destination. Almost always, these kinds of terms refer not to scaling but to something magical, like saying “and then a miracle happens.”
Now, I am not wading into the endless debate about whether organizations themselves need to grow to achieve scale or entrepreneurs should expand innovation through knowledge sharing and the like. Any approach that works is fine with me, as long as the actual objective is systemic change within a time horizon sooner than “someday.”
Scale poses the question, are you trying to substitute your effective approach for the ineffective way that most people are served now? Are you actively working under a well-developed plan to accomplish systemic change on a time horizon that transforms the lives of the current generation of beneficiaries? Do you consider yourself unsuccessful to the extent the glass is not yet full?
Now I may be a scale junkie, but I’m not a scale snob. Scale isn’t imperative for every program. More effective approaches to serious social problems are always a good thing, no matter how many people they reach. Trying to grow by 20% a year is an admirable and worthwhile endeavor, and capable organizations should be encouraged to measure their performance against such accountable goals. The social sector would be vastly more productive if many more nonprofits increased their impact using those kinds of yardsticks. (Two masterful books explain how: David Hunter’s Working Hard & Working Well, and Bob Penna’s The Nonprofit Outcomes Toolbox.)
But for a highly select group of organizations, growth alone — whether steady, rapid or accelerating — is not enough. It will not lead to the kind of systemic change of which they just might be capable and which could bring a preventable or manageable social problem under control. For a few programs that are demonstrably superior to the status quo and addresses such devastating social needs that it would be unconscionable not to make it universally available, we have to be willing to say that the time has come to really scale, and to be dissatisfied until we do. In those cases, we must acknowledge that the sector is failing its most important goal.
You’ll have noticed, no doubt, that I’m conspicuously avoiding exactitude. What’s so objective and measurable, you might well ask, about “more or less,” “substantially” and “essentially”? For all my loft aims, I’m staunchly realistic. I know we’re never going to completely prevent child abuse or house every single homeless person. Not only can’t we solve pervasive and long-standing social problems entirely, we can’t identify every single person facing such problems or even those that could benefit from an effective intervention.
But precision is not the point. Because we know how to respond to some of these problems to an extent that we never could before, we must now ask how can we disseminate those innovations that “work” to the greatest extent possible. Before we can know how to fill the glass, we must first have some idea of just how big and how empty the glass is now. Whether we count the volume exactly or supply 100% of the water needed isn’t important. Right now, we don’t even ask how big the gap is, nor do we try to fill it, because we find the task overwhelming, and not without reason.
Scale is a relative term that is roughly measured by how far you have left to go, as opposed to various ways of talking about growth that just ask how far you’ve come. Again, trying to go farther than you have is always commendable. But if you have the means to climb the mountain, then you should ask how tall it is, how close you are, and what and how long will it take to reach the summit. When you’re less than 5% of the way there, as we are now, just going farther isn’t good enough if you’re capable of getting to the top, or even nearly so.
SCALING IN PRACTICE
Few nonprofits not only commit themselves to solving massive social problems, but actually develop plausible strategies and plans for doing so to which they hold themselves publicly accountable. Here are some examples:
National Center on Time and Learning
On October 2, 2007, NCTL announced a goal that “in ten years at least one million children in high poverty communities will attend schools that have redesigned their school day to expand learning time and a majority of schools with this new school design will cut the achievement gap at least in half.” In 2011, I published a paper in the Philadelphia Social Innovations Journal that assessed the feasibility of this worthy goal. I believed (and still do) that NCTL could reach that many students, but not in the way it seemed to be going about it. Looking at their existing growth rate (line 1), I didn’t see any realistic way to increase their incremental growth (lines 2, 3 and 4) to reach the goal in time.
The only way to do so, I concluded, was by changing their strategy from incremental growth (handfuls of schools at a time) to step-change growth (at the district or metropolitan level), as in line 5. This would be similar to the sector-based growth that the Omidyar Network’s Matt Bannick and Paula Goldman have proposed. (See SIB Trib No. 1) I didn’t realize it at the time, but now I see that “scale finance” could enable that kind of exponential growth.
Year Up
Year Up’s mission is to close the opportunity divide for disengaged urban youth. In June, 2011, it published a prospectus for an “Opportunity Campaign” to raise $55 million “to increase Year Up’s capacity to close the Opportunity Divide on a national scale.” Part of its strategy is to develop a “Million-Person Model” “that can grow rapidly to serve many more young adults across the United States ..., with a focus on innovations that allow for greater scale.” The prospectus notes parenthetically that “serving all 1.4 million young adults in our target population would require us to raise $11.2 billion in private philanthropy each year.” Lest anyone think that Year Up had taken leave of its senses, the prospectus characterizes that as “an infeasible fundraising burden.”
Nurse-Family Partnership
In August, 2010, NFP published a “State Needs Assessment” document that is notable for its candor about what it will take to move the needle for Medicaid-eligible young women who are pregnant with their first child:
“In NFP’s experience, improving public health outcomes on a population basis depends on making home visiting and other effective programs and services widely available to a particular community in need. Small scale implementations rarely result in measurable public health improvements at a community level; States should aim over time to offer Nurse-Family Partnership to the majority of eligible women and families who are most at risk in order to achieve measurable improvements in their health, development, education, and well-being.”
Stepping away from vague generalities, NFP provides a detailed table comparing “the [estimated] total NFP-eligible population by States (first-time low income mothers), and ... the current service capacity of all established NFP programs in that States.” It proposes that “the gap between current capacity and Statewide eligible population provides a broad target for multi-year, incremental, Statewide expansion of NFP services.” The table shows what it would take to grow each of its current states to reach 50% of the eligible population (versus what I estimate to be its current reach of about 3% nationwide).
Lumina Foundation
On February 3, 2103, the Lumina Foundation published its 2013-2016 strategic plan for “Goal 2025.” The new document updated its 2009 strategic plan which was “based on the goal that 60% of Americans obtain a high-quality postsecondary degree or credential by 2025.” Lumina described the 2009 goal as “audacious but attainable,” and it reiterated in 2013 that “the goal has always been more than a vision statement—we believe it must be attained, and we believe it can be attained.” The revised plan advances eight actionable strategies to help produce an additional 23 million degrees, certificates and other high-quality credentials:
“Between 2009 and 2025 lie 16 years. Our first strategic plan covered the first quarter—the first four years—and this strategic plan will take us halfway to 2025. We have set the stage for reaching the goal, but we believe over the next four years we must do two things: develop a clear understanding of what we must do to create a system of higher education that can reach much higher levels of attainment, and make real progress toward the 60% goal.”
CAN SIBS ENABLE SCALE?
A few big thinkers have started to connect impact investing to true scale. In their fine book, Impact Investing: Transforming How We Make Money While Making a Difference, Antony Bugg-Levine and Jed Emerson play out a metaphor first proposed by Jessica Freireich and Katherine Fulton in the Monitor Institute’s seminal report, Investing for Social and Environmental Impact. They remind us that the 1980 Initial Public Offering of what was then called the Apple Computer Company “transformed the trajectory of a previously unheralded financial innovation” to such an extent that “what was previously viewed as a crazy approach is now a standard component of investment portfolios, known as the very mainstream concept of venture capital.” So, they ask, “What Will Be Our ‘Apple IPO’?”:
“What will be impact investing’s Apple IPO? In what geography or sector will the concept of impact investing for blended value find a success so compelling that it commands attention, overcomes the skeptics, and propels us into the mainstream? ... This ‘IPO’ will occur when we can point to a compelling social or environmental challenge that impact investment-backed enterprises solved at a level that would not have been possible for government or mainstream markets alone.”
Could scale finance develop the social-sector equivalent of the Apple IPO? Could such funding expand our best social innovations to reach at least 20% of the eligible population in a defined geographical area over five to ten years, while maintaining established levels of effectiveness?
I can’t pretend to know whether this can be accomplished until we try, but I do believe there are two basic steps to getting started: selecting the right programs and designing the right transactions in ways that satisfy the following eight conditions:
Program Selection
1. Evidence. The intervention must have a “top-tier” evidence-base such that fundamental questions about effect sizes and attribution have already been answered to an extent that all stakeholders consider sufficient for this purpose. These questions would not be revisited as part of any pilot project.
2. Fidelity. There must be a reliable framework for implementing the innovation in substantial compliance with all key performance indicators. Fidelity to the model would be a primary consideration in assessing project success, since the evidence base adequately demonstrates what the outcomes will be when the program is delivered properly.
3. Capacity. Scale finance would be reserved for mature programs with clear potential for exponential growth. The service providers must have “growth-ready” leadership, finances, operations, and performance-management capabilities. It must also have a robust delivery network of significant scope that reliably provides the innovation at high levels of effectiveness at the current scale of operations.
4. Data. Robust and comprehensive data must be available on the affected population, existing services, costs, and social impairments, as well as on the outcomes, impact, cost, and potential savings of the innovations. While pilots cannot proceed if there are major gaps in the data, they can and should integrate and analyze disparate data that have not been aggregated fully.
5. Savings. Rigorous cost-benefit analysis must demonstrate that the innovation “math” has the potential to be financially self-sustaining at scale. Again, the reliable results about cost, impacts and savings from existing research would be incorporated as givens and not be reconsidered as part of any pilot project.
Designing the Transaction
6. Origination. Alongside these exceptional providers, investors, advisors and intermediaries would be full and active participants from day one. Government engagement can wait until social entrepreneurs and investors confirm that the proposed transactions are financeable, with specific funding sources and structures identified. They would then originate financeable transactions with low operational risk for consideration by governmental and non-governmental payers.
7. Size. Transaction sizes must be large enough (north of $50M) to (a) amply cover all direct service costs, as well as necessary working capital for infrastructure, intermediation, performance and risk management, and course corrections, and (b) pay investors > 5% return. Those fixed costs kill the ROI for smaller deals.
8. Governance. The project must have effective cross-sector governance and payment mechanisms that avoid unnecessary legal or technical requirements that undermine the social and financial objectives of the project itself. The formation of the project and its legal and financial structure would be developed “on a clean sheet of paper” and not by reference to governmental procurement processes or standard terms and conditions for public service delivery contracts. Of course, any contract would have to comply with all applicable legal requirements, subject to any modifications the legislature might enact in SIB enabling legislation.
In order to shift gears from growth to scale, we should begin by asking highly successfully social entrepreneurs to come up with their “maximum feasible growth rates”: the percentage of need they could realistically meet within a time horizon that investors would accept and without compromising their results if money were not the primary limiting factor. Scaling these exceptional programs isn’t just a matter of adding money. Read Gerald Chertavian’s wonderful book, A Year Up: How a Pioneering Program Teaches Young Adults Real Skills for Real Jobs-With Real Success, to see what it takes Year Up to place urban youth on career paths to the middle class. Read Lumina’s eight strategies or NFP’s detailed manuals on “Implementation Overview & Planning,” “Guidance for Implementation and Quality of the Nurse-Family Partnership Program” or “Expanded Data Collection, Reporting and Quality Improvement Strategies.” Try out NCTL’s frameworks for assessing teacher collaboration and enrichment programming, or its classroom time analysis tool.
If you asked these social entrepreneurs, “if money were no object, how big and how fast could you grow over five to ten years and maintain the same results you get now?”, I think they’d be happy to come up with an answer. I’m fairly confident the answer would not be large enough to reach anywhere near half of the population-in-need, but it might be 10 or 20% in two or three states, which would far exceed anything they’re actively working on now.
HOW MUCH WOULD SCALING COST?
Ah, the hardest question of them all. Based on the very few scaling plans available, it would unquestionably cost billions of dollars per year to fully scale each one of these rare programs. Even I accept that SIBs and pay-for-success financing won’t have that kind of capacity any time soon, even though there’s clear evidence that several of these programs produce short- and medium-term savings that exceed their costs.
But didn’t JP Morgan say that the emerging — and much broader — “asset class” of “impact investments” “offers the potential over the next 10 years for invested capital of $400bn–$1 trillion and profit of $183–$667bn” within just five global sectors: housing, rural water delivery, maternal health, primary education and financial services? For SIBs, it’s not premature to ask if we even have visibility to our first billion. Can scale finance get there anytime soon? For the strict parameters I’ve defined for scale-ready programs, could the answer to the maximum feasible growth question be expansion that costs hundreds of millions per year now? Could an “Apple IPO” get us there?
Andrea Phillips doesn’t think so. Andrea was on the team at the Goldman Sachs Urban Investment Group that closed the $9.4 million SIB with New York City, the first and so far only SIB in the US. She offered an estimate of the potential size of the SIB marketplace at a January 16, 2013 panel discussion entitled, “SIBling Revelry: Are Social Impact Bonds the Next Big Thing?” hosted by the Hudson Institute’s Bradley Center for Philanthropy and Civic Renewal:
“So in closing, a couple words about whether this is scalable or replicable. What I would say is I am cautiously optimistic. I don’t think three years from now we are going to have a $500 million dollar bond market that’s tradable in Social Impact Bonds, but I do think five years from now there will be a sort of healthy marketplace where financial institutions like Goldman Sachs are providing the capital for these types of initiatives. And it will be a growing market and a scaling market. Right now, $10 million is probably a good size for one of these deals. I hope five years from now they’re $100 million dollars.”
Keep in mind that she’s talking about the entire SIB marketplace: $100 million in five years. On that trajectory, when could $100 million grow to even $1 billion, let alone the several billion that a handful of our best organizations could deploy each year? I suspect Andrea’s answer might well be, “At least twenty years from now.”
Now, Andrea works at Goldman Sachs and I work in my basement, so if I were you, I’d listen to her. But since I’m not you, I can think differently.
Two words, my friends: “scale finance.”
