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July 08, 2011

The Case for Social Entrepreneurs

The global economy remains an admixture of booming and slumping economies. Hanging heavy over the slumping economies is a mountain of debt. As politicians wrestle with how to get a handle on deficit spending, one thing is clear -- spending for new programs is unlikely to emerge and spending for current programs is likely to be curtailed. Social challenges, however, like reducing poverty and improving education, are not going away. That is why countries like the U.S. and Britain are hoping that so-called social entrepreneurs can help find answers to those nagging challenges by engaging in public-private partnerships. Even in booming emerging market economies, public-private partnerships and social entrepreneurs have a role to play. If you are unfamiliar with the term "social entrepreneur," The Economist defines a social entrepreneur as "someone who develops an innovative answer to a social problem (for instance, a business model for helping to tackle poverty)." ["Let's hear those ideas," 12 August 2010]. According to the article, social entrepreneurism and social innovation go hand-in-hand. Concerning "social innovation," the article states:

"'Social innovation' is the increasingly common shorthand for [an] approach to public-private partnerships. It differs from the fashion in the past couple of decades for contracting out the delivery of public services to businesses and non-profit groups in order to cut costs, in that it aims to do more than save a few dollars or pounds—although that is part of its attraction. The idea is to transform the way public services are provided, by tapping the ingenuity of people in the private sector, especially social entrepreneurs."

Last year, the Obama administration established a "Social Innovation Fund (SIF)" and seeded with "about $50m of public money." That sum was "more than matched by $74m from philanthropic foundations." According to the article, the money "will be given to some of America's most successful non-profit organisations, in order to expand their work in health care, in creating jobs and in supporting young people." The article continues:

"A decade ago the term [social entrepreneur] was scarcely heard; today everyone from London to Lagos wants to be one. Social-entrepreneurship conferences are invariably the best attended events for students at leading business schools. The idea behind social entrepreneurship is that fresh, businesslike ideas will bring about a productivity miracle in the 'social sector' (public services plus charity) similar to the one that began in business in the 1990s. Already, a growing number of social entrepreneurs have made a mark. The best known is probably Muhammad Yunus, the Bangladeshi founder of Grameen, a microfinance bank, and winner of a Nobel peace prize. Another prominent example is Wendy Kopp, the founder of Teach for America, which puts thousands of recent graduates from leading universities to work as teachers in some of the country’s worst schools. However, so far the enthusiasm for social entrepreneurship has run ahead of its effects. The problem has not been a lack of good ideas (even if plenty of people who call themselves social entrepreneurs are in truth conventional charity workers). Innovative projects have ameliorated seemingly hopeless social troubles, for instance by reducing rates of reoffending by former prisoners or by helping children from the rougher parts of American cities to graduate from college."

I do believe there needs to be a sharp distinction made between a charity and a social entrepreneurial enterprise. A social entrepreneurial enterprise should be run like a business. It should be profitable, with profits reinvested into making society better. I'm not being dismissive of charities; they have a role and accomplish some wonderful work. Charities, however, are better known for their compassion than their hard-nosed business attitudes. Charities spend a lot of time, effort, and resources into raising money. A successful social entrepreneurial enterprise should make rather than raise money. The Economist notes, however, that "social entrepreneurship does not yet have a Microsoft or a Google." It asserts that "successful innovations have spread only slowly, if at all." Hence, "the problem is ... one of speed and scale." If such enterprises don't show more promise in the near future, the enthusiasm for social entrepreneurship may wane. That's why, the article states, "Policymakers hope that with encouragement from the state social entrepreneurs' best ideas can be spread faster and wider."

With the Greek financial crisis and U.S. deficit reduction fights grabbing so many recent headlines, one would think that social entrepreneurism would be an idea that would be embraced by both conservatives and liberals. The article explains:

"Politicians' interest in social innovation has been sharpened by the rapid deterioration of governments' finances. Even sustaining today's public services out of taxes alone looks impossible. Fresh ideas that promise as much, or more, for less are welcome."

The article goes on to discuss a book entitled The Power of Social Innovation that contains a foreword by New York's mayor, Michael Bloomberg. It continues:

"This book is a sort of bible of social innovation, full of examples of social entrepreneurs' successes. It sets out both the potential of the partnership approach and the huge difficulties it will have to overcome. Its author, Stephen Goldsmith, [formerly] a Harvard professor, [writes] from experience. As Republican mayor of Indianapolis, he won a reputation as a leader of a new breed of reform-minded American city bosses. His obsession with value for public money led him to fire 40% of the city’s non-uniform workers. He improved quality and cut costs by letting private firms compete with the public sector to supply many of the city's services. After the presidential election of 2000 he joined the administration, helping to shape George Bush's plan to hand provision of some services to faith-based groups. He became chairman of the Corporation for National and Community Service, which now oversees the SIF."

Goldsmith believes that we have reached an historical tipping point; the threshold of a new stage of how states deal with social challenges. The article explains:

"Mr Goldsmith says that society is on the threshold of the fourth stage of how it addresses its thorniest problems. In stage one, at the start of the 20th century, caring for people was largely left to families and charities. In the second stage, marked by the welfare state in Britain and the Great Society in America, the government took on the job of ending poverty. Private efforts were largely crowded out. In stage three the state tried to foster partnerships with the private sector through competitive outsourcing, but although this sometimes made a big difference (as in Indianapolis), too often the partnerships were too prescriptive and highly focused on cost-cutting. In the fourth stage government will tap the ability of the private sector, for-profit and non-profit, to deliver 'disruptive, transformative innovation'."

Following publication of the book, Goldsmith accepted Mayor Bloomberg's offer to become New York City's deputy mayor for operations. According to The Economist, Goldsmith's "task is to build on the mayor’s work in social innovation." In March of this year, Goldsmith wrote that problem with the current state of governmental affairs is that "progressive government ... no longer produces progressive results." ["Progressive Government Is Obsolete," Wall Street Journal, 18 March 2011] Unlike many conservative politicians who hiss the word "progressive," Goldsmith recognizes that progressive aims are good but aren't going to be achieved using traditional government methods. In his new role as deputy mayor, Goldsmith is experiencing some frustration. As he tries to tackle problems, he faces challenges like "antiquated and overly complex procurement rules" and "complex bureaucratic processes" that "lead to year-long delays and waste millions of taxpayer dollars."

There's little wonder that social innovation has been stymied by a system aimed at preserving the status quo. In the long run, both taxpayers and those who desperately need social services are losers. Goldsmith concludes, "The first rule of city government should be an unwavering commitment to delivering real value to the public with every tax dollar. That would be real progress." Of course, that should be the first rule of all levels of government, not just local government. Obviously, Goldsmith believes that this is best accomplished by moving governments to the fourth stage by partnering with the private sector to deliver "disruptive, transformative innovation." That's where social entrepreneurs come in. The Economist asks, "How do you know that an innovation works?" It continues:

"Businesses have profit; the social sector lacks a similarly simple yardstick. Often the things that are easiest to measure—say the number of people coming through the door of a community centre—tell you nothing about an activity's effects. ... One continuing challenge will be 'to figure out what types of evaluation work at which stage of the scaling-up process', says Sonal Shah, head of the [White House’s Office of Social Innovation and Civic Participation (OSICP)]. Requiring private capital is another way to bring rigour."

One of the more intriguing funding ideas raised by The Economist is "the social-impact bond."

"This is a derivative tied to the performance of a non-profit organisation that is trying to tackle a difficult social problem—in the first instance, reducing the rate of reoffending by young prisoners. Private investors hand money to the selected organisation ... which then has the long-term capital to scale up its model without having to spend a lot of time raising funds. Depending on the recidivism rate, the government will pay investors in the first bond a return of 7.5-13%—or nothing, if the promised improvement is not achieved. In many ways the social-impact bond epitomises the new approach to social ills. It provides long-term funds for promising ideas; it transfers risk to private capital markets; and it costs public money only if the scheme provides specific social benefits."

Nowadays a return rate of between 7.5 and 13 percent looks pretty enticing; but the risks are high and the article states that it remains to be seen "whether such bonds can attract enough profit-seeking money to make a real difference." If the venture does scale well (i.e., proves to be a successful social program), it still needs to figure out ways to succeed without continued government backing -- otherwise, it just becomes another charity or non-profit that doesn't fit the definition of being a social entrepreneurial enterprise.

Another way that Obama administration hopes to raise interest in social innovation is through cash prizes like those that have been offered by DARPA. The article notes, "The difficult bit is to define the contest precisely enough to reward genuine innovation that is truly useful—which is easier for scientific innovations than for social ones." Although the administration has high hopes for its Social Innovation Fund, The Economist believes that those pressing for innovation are likely to confront the same kind of bureaucratic inertia that Goldsmith has encountered in New York City. Goldsmith told the magazine, "I can think of 1,000 innovations; [but] I have not yet had an innovative idea in any meeting that was legal." The article concludes:

"There are also powerful political pressures in favour of the status quo to be outmanoeuvred. For instance, America's teaching unions have been fiercely opposed to many education innovations pushed by social entrepreneurs, including charter schools, and to the billionaire philanthrocapitalists who help finance them, such as Bill Gates and Eli Broad. There have been criticisms of the grant to New Profit because its founder, Vanessa Kirsch, once hired Michelle Obama. Success may depend on the emergence of a subgroup of social entrepreneur that Mr Goldsmith calls 'civic entrepreneurs', who can navigate the treacherous waters of bureaucracy. Candidates should apply for a government job at once."

Regardless of the challenges faced by social entrepreneurs, John Tozzi claims, "Businesses that aim to tackle social ills and turn a profit are getting attention from mainstream investors." ["America's Most Promising Social Entrepreneurs 2011," Bloomberg BusinessWeek, 22 June 2011]. A slideshow that introduces readers to the 25 highlighted entrepreneurs can be viewed by clicking on the following link.

I tend to agree with Stephen Goldsmith that we are on the verge of a fourth stage of governance when it comes to meeting social challenges. As I stated earlier, however, I believe a clear distinction needs to be made between charities and social entrepreneurial enterprises. Even if the latter are provided seed money by governments, in the end, they must stand on their own. Sarah Murray wrote, "Social entrepreneurs use a variety of business models. Some might be for-profits groups with a social mission. Others could be nonprofit organisations embracing a revenue model, while many are hybrids, in some instances with support from governments. However, they are united in their aim to use market drivers to tackle social and economic problems." ["The importance of a local connection," Financial Times, 27 January 2010]. Without such programs, governments aren't going to be able to meet social challenges without overburdening the economy with repressive taxes. Let's hope that enthusiasm for social entrepreneurism remains high among our smart, young population. If it doesn't, our deficits may have already squandered their future.

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