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Voices Social entrepreneurs

Innovating at scale in the social sector

Jonathan Bays McKinsey & Company

Jonathan Bays is a consultant in McKinsey & Company’s Social Sector Office, which helps organizations address societal challenges. Based in New York, he specializes in philanthropy and economic development, working primarily with grant makers and nonprofits on issues of strategy. Before joining the Social Sector Office in 2005, Bays worked as a policy advisor in the Office of the Prime Minister of Canada. He was previously a consultant in McKinsey’s Toronto office. Bays graduated from the University of Toronto with a BA and MA in history. He received his M Phil and D Phil in international relations from Oxford University, where he was a Rhodes Scholar.

Marla CapozziMcKinsey & Company

Marla Capozzi is a consultant in McKinsey’s Boston office.

Thirty-four years ago, Muhammad Yunus had a very good idea: he made a collateral-free loan of $27 to a group of 42 families in rural Bangladesh, to be used as working capital for home-based basket-weaving businesses. When that loan generated a profit for the families and was repaid in full, he demonstrated not only that the working poor could be credit-worthy, but that even a small loan could make a major difference to their economic situation.

But a good idea is only one step in the innovative process. Since that first loan, Yunus and his colleagues at Grameen Bank have built an institution that has made enterprise loans to more than two million people and added a range of other services. They have also helped to inspire a microcredit movement that now has more than 150 million customers worldwide.

The challenge for the social sector is how to replicate this kind of impact. The philanthropic and academic attention that social entrepreneurs have attracted over the past ten years—evident in the growing activities of organizations like Ashoka, Echoing Green, and the Skoll and Schwab Foundations—suggests that there is no shortage of good ideas for achieving social change. But we need to be systematic in developing those ideas in order to create maximum impact. The questions that face social entrepreneurs are the same ones that private-sector innovators grapple with: Do we have the right ideas in our pipeline? How do we select the best ideas? Are they big enough to have the impact we desire? How do we test and scale them? How can we assess our results? Fortunately, there are clear best practices for fostering innovation and executing on good ideas—and there are great examples of social-sector organizations that are applying them.

Characteristics of leading innovators

The most successful innovators, whether in businesses or social-mission enterprises, excel at three capabilities: leadership, creative discipline, and organizing for innovation.

Leadership
Strong leadership is the best predictor of successful innovation, so leaders seeking innovation must be actively engaged in direction setting and decision making. The leaders at the most innovative organizations do this in three ways. First, they carefully define goals and the types of innovation required to meet them. They also make innovation a core part of the agenda for the top team, which reviews progress, makes midcourse corrections, and celebrates successes. Strong leaders must also build inclusive organizational cultures that embrace experimentation and make the implementation of new ideas a core element of strategy.

Creative discipline
Good organizations recognize that creativity is essential, but they make sure to balance it with analytical rigor. Doing so allows them to generate insights and breakthrough ideas while managing risk. How do they achieve that balance? First, they manage their ideas in a portfolio that takes account of both the length of time required to realize an idea and the risk and reward associated with it. Second, they develop clear criteria for how to select and scale ideas within this portfolio and then actively manage each idea’s progress. Finally, they continually develop and refine new ideas, always keeping the end user’s needs in mind—a strategy that allows them to challenge orthodoxies and rapidly test breakthrough solutions.

Alignment
Innovators must align their organizations to deliver impact by putting in place structures and systems that enable innovation. This could include the creation of innovation centers to find and scale initiatives, especially those that are relatively far from the organization’s core activities and need an early boost. Skilled innovators should also foster open innovation networks that provide access to outside ideas, making it easier to find and cultivate new initiatives and identify high potential areas of development.

Innovating at scale in the social sector

Across the social sector, leading innovators are applying these principles to produce significant social impact.

In Mexico, a recent collaboration among multiple public-sector institutions, a network of more than 23,000 community-owned stores, and the Bill & Melinda Gates Foundation promises to bring affordable financial services to millions of the rural poor. Since late 2008, a pilot program has installed point-of-sale devices in a small number of government-supplied, community-owned Diconsa stores, which offer agricultural goods and staple foods in Mexico’s most rural communities. Using these devices in combination with smart-card technology, the government has started to deliver existing benefit payments through this new channel, reaching nearly 200,000 households to date. These households previously had no access to formal financial services and faced relatively high transaction costs in collecting these payments. At full scale, the program has the potential to reach 4 million people and to be the basis for a broader offering of financial products such as savings, credit, and insurance that could protect the rural poor against economic shocks and allow them to take better advantage of opportunities.

The Diconsa program shows the power of using the best practices we’ve described to turn an innovative idea into a high-impact, large-scale program. The involvement of the Bill & Melinda Gates Foundation helped the partnership to define the type of innovation it needed and to manage the potential risks. Drawing on its efforts around the world to bring financial services to the unserved, the Bill & Melinda Gates Foundation challenged the group’s initial plans and improved them by facilitating access to experts in product design, technology, and consumer behavior. It also provided patient capital for the pilot programs, allowing the partners to invest in product development and testing with less financial risk.

The Diconsa partnership also made extensive use of user-centered prototyping. Rather than aiming for a “perfect” product at scale, Diconsa focused on rapid experimentation in the field. The first pilot was launched soon after the partnership was formed and was aggressively managed, with team members frequently dispatched to the community to observe customer behavior and make immediate refinements. This strategy allowed the program to secure early successes and expand more quickly. As a result, it reached 200,000 households in fewer than 18 months, despite making several modifications to the model—or possibly as a result of doing so.

Ashoka’s Changemakers program provides another example of a social-sector organization using these principles to drive innovation. Changemakers engages a network of several thousand social entrepreneurs in developing solutions to a range of difficult social challenges, using the framework of a prize competition. Run in an ongoing series—each focused around a different topic, such as water in the developing world—these competitions set explicit targets by using a “Discovery Framework” that outlines the key barriers and insights for a particular problem. This approach helps participants to identify innovation gaps and highlights the solutions that have the greatest potential. The exercise is a powerful method for defining the innovation target in a particular area and of prioritizing early on so that efforts are focused on the highest-potential solutions

Once Changemakers defines the target, it asks its network to develop solutions in a transparent competition that encourages collaboration among those with similar ideas. Participants in this open-innovation network post their entries online for others to view. They then refine the entries as the competition progresses. This approach not only encourages social entrepreneurs to move into the “white space”—areas of the solution set where no one else is active—it also allows them to learn from each other’s entries when refining their own. Even more important, it facilitates collaboration among entrepreneurs.

The final judges of a Changemakers competition are the public—anyone who registers can vote online for the three best entries. But the institutional sponsor of the competition (usually a corporation or philanthropic organization looking for scalable ideas), helps to choose the larger roster of finalists, any of whom may eventually secure investment from the sponsor, regardless of who wins the public vote. This approach effectively creates an instant portfolio of ideas with different risk and impact profiles and it neatly solves the problem of “What next?” Changemakers’ sponsors say they find investable ideas across the portfolio.

Changemakers and the Diconsa partnership have succeeded in applying best practice in innovation to solve difficult social problems—whether defining concrete goals for innovation, testing and refining ideas rapidly, or building open-innovation networks. These examples should serve as an inspiration for other institutions pursuing social benefit as they seek to apply the same principles more widely and systematically and to put innovation consistently at the core of their social-impact strategies.

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