Strategies to Grow the Solution Economy1
Strategies for Government
Procurement
Open up procurement. Government can use its buying power to shape and create solution markets. One strategy is to open public sector procurement to providers that compete with incumbents—including in-house resources. Lowering barriers to entry and simplifying the bidding process for government contracts would allow competition that drives improved services.
Use purchasing power to create demand. Governments have vast purchasing power that can generate anchor demand for solutions that address social issues. Once providers find ways to innovatively meet demand, they may be well positioned to extend services to segments beyond government purview.
Create markets for outcomes. Prizes and challenges, social-impact bonds, and pay-for-success approaches dictate outcomes instead of processes. By rewarding new solution providers, outcome-based efforts help to grow the supply side.
Be open to different routes to a desired outcome. Relying on current processes greatly limits imagination. Focusing more on the question “What does success look like?” opens up a range of new approaches. It elevates the “customer” experience as a critical measure of performance and may entirely reorient service delivery.
Encourage a diverse provider-player mix. Promoting and supporting a diverse range of players increases the mix of solutions and collaborative models that may emerge. Creating platforms for a wide variety of players to offer input, with incentives to pilot potential solutions, activates a wider community around developing solutions to the problem.
Train procurement officials to be smart buyers. Training will enhance their understanding of the solution economy and improve their ability to discern effective solutions from less effective ones.
Policy
Open up public data. In the right hands, public data can produce billions of dollars in value and help assess the true impact of government programs. Making such data public taps the power of vast networks of problem solvers.
Expand citizen choices. A one-size-fits-all approach to public services fails to meet the diverse range of citizen needs. Competitive markets for public services via citizen-choice models benefit from the same advantages that competition brings to consumers: greater choice of suppliers, greater variety of offerings, and lower prices. Greater choice also enables citizens to customize their experience.
Minimize losses by admitting to failure early on. Create a culture that encourages public officials to admit failure early on and, hence, to recover from it quickly in order to encourage productive experimentation of new services and delivery methods. From the outset, clearly define what success looks like to help those in the organization recognize leading indicators of weak performance and course-correct early. One of the main barriers to choice and competition, for example, is deciding how to respond when new, publicly backed ventures fail. The UK government has created a process to determine whether a venture has failed, and then to maintain continuity of service during transitions.
Be judicious about the “smart subsidies” offered to providers and users of market-based solutions. Smart subsidies can improve affordability for the poorest and encourage businesses to cater to this group. Consider the effectiveness of the US food stamp program. However, subsidies are difficult to remove once created and may bring excessive costs, so determine whether the subsidy effectively addresses a long-term systemic issue. Where temporary or cyclical market failures are to blame, explore flexible, less permanent approaches.
Embrace lightweight solutions. Leveraging lightweight strategies—the internet for distribution, peer-to-peer networks, citizen co-creation, and so on—can yield enormous savings and agility over centralized, resource-heavy approaches.
Shift power via co-production and co-creation. Government can leverage a growing network of digitally empowered citizens. Co-creation and co-production focus on developing and delivering new solutions with people, rather than for them.
Connect government resources to solvers. From data to distribution networks, from financing to policy expertise, government has a host of resources that can help catalyze and scale solution ecosystems. Improve access to these resources, and encourage citizen changemakers to utilize them for broader public benefit.
Train the next generation of cross-sector solvers. Grow a cadre of leaders adept at solving big problems across sectors. A White House group addressed that question in 2012, developing a set of competencies needed for cross-sector solvers. Once cohorts of solvers are assembled, they should be empowered to try and test new approaches across sectors. Openness to experimentation encourages solvers to openly share what does—and doesn’t—work in different contexts, minimizing preventable failures.
Legal and Regulatory Considerations
Avoid overregulating the sharing economy. Despite the usual regulatory instinct to provide safety nets for citizens in an informal economy, remember that most creators of two-sided markets actually share government’s goal of helping citizens and find efficient ways to do so. Where possible, work with these organizations to keep abusive or fraudulent users out of the marketplace.
Recognize social enterprises as a new form of business. By creating a new legal designation for businesses that pursue social returns in addition to financial ones, government can encourage a new class of enterprises that deliver services to citizens in a more financially sustainable way than traditional nonprofits. A separate designation widens the range of potential investors, provides greater operational freedom, and makes it easier to track the evolution of the sector.
Finance
Maximize resources through matching. Jointly funding projects with impact investors, foundations, and businesses offers government a compelling alternative to reducing services in the face of budgetary constraints. Moreover, joint action supplies more innovative, customized offerings to citizens. Consider USAID and Skoll Foundation’s $44.5 million alliance that brings a venture-capital-inspired approach to fueling innovation in the areas of health, energy, governance, and food security.
See the “Strategies for Investors” section for additional financing actions that government can take to catalyze the solution economy.
Strategies for Business
Align social criteria with the firm’s mission and long-term goals. This enables a company’s culture and social mission to grow together, rather than feeling like a generic CSR public relations campaign. As Mark Kramer, founder of FSG, says, “social change becomes part of the competitive equation.”
Assess daily business decisions against social criteria. Begin by identifying the societal needs, benefits, and harm that a company delivers through its routine business practices.2 Once social criteria are accounted for, certain daily operating procedures may stand out as greater risks and may warrant a change in procedure.
Adapt the core strengths of a business to social needs. Think about your company’s capabilities in the broadest sense. In what ways could the staff members contribute, and how might this enrich their experience? In the process, gaps or complications may emerge that lie beyond the business’s current reach. Which individuals or organizations might have faced these hurtles before? This may point to potential partnerships.
Target the gaps. Develop new markets by meeting neglected needs. Wavemakers approach gaps in basic needs not as obstacles but as market opportunities. The base of the economic pyramid and the neglected health-care needs in Western countries represent gaps that numerous organizations profiled in this book target successfully.
Explore reverse-innovation opportunities. General Electric has made reverse innovation a cornerstone of its growth strategy, importing products from emerging markets to create new markets in the developed world.3 One GE team, for example, developed a pocket-sized ultra sound scanner, so that mobile doctors could perform tests for rheumatic heart disease—a common disease in young people in developing countries. The portability and usefulness of the device also translated to its adoption by practitioners in the Western world.
Make a bold commitment. Directly linking a company’s giving and its revenues demonstrates a bold commitment to social values. It’s a company’s way of saying “my gain is your gain.” The makers of KIND healthy snacks, for example, donate to the NGO PeaceWorks with every snack purchased at accessible chains like Starbucks.
Look for ways to socially leverage existing infrastructure. Many social problems do not necessarily require new resources, but instead simply need better use of their existing infrastructure. New business models in car sharing and ridesharing, energy optimization, and recycling show how a novel implementation of existing resources can expand opportunities.
Buy differently. Altering sourcing practices can enhance social, financial, and environmental outcomes, directly benefiting buyers and consumers in the process.
Explore how existing business models could be adapted to low-income markets. Reaching out to new segments like the base of the pyramid may require investing in product development, aligning internal processes, potentially updating legacy systems, and even adopting a longer time horizon to recoup up-front investments. Weigh the social and financial opportunities of entering a new segment against these hurtles to determine whether the business can realistically benefit from taking the plunge.
Create measurable milestones of societal success. Consider the longterm view and how the company’s net contributions to society can be tracked over that period. Revisit immediate objectives, like quarterly earnings, by asking questions like “Do the actions we are taking to meet this immediate goal help or hurt our social-impact goals?”
Seek donor partners. Coca-Cola, Bayer, Safaricom, and other companies have received funding from foundations and development institutions to serve developing-world populations. Donors can assist organizations by helping to cover otherwise prohibitive up-front costs or by stimulating demand for base-of-pyramid markets.
Build a strategy to leverage open data. As governments open up their data, businesses can incorporate that information into their own services, enhance their own customer data, and use their data analysis to identify opportunities governments missed. As companies set their sights on new segments of the market where they lack certain data, these sources of information can inform business decisions and guide a company’s strategy.
Become an integrator in solution ecosystems. Set sights on a quantifiable outcome that the company is well positioned to pursue but that will resonate with a wider audience, and seek out a team of contributors to help your company reach the goal. By originating the goal and being the first to commit, you position the company as an influential backbone of the ecosystem.
Enterprise Level
Team up to increase early-stage funding. Early-stage funding is scarce because of the higher risk threshold. To encourage innovative solutions, donor capital can combine with commercial capital to provide early-stage funding for social enterprises and market innovators. Overall funding levels would likely improve if more organizations would be willing to front a higher proportion of the risk to encourage other investors to start serving early funding needs.
Embrace risk, and acknowledge failures. Working at the frontier of the solution economy in the hope of breakthrough impact is an inherently risky endeavor. Funders need to be comfortable with new models, new markets, and significant, if not high, rates of setback and failure.
Be prepared for the long haul. Recognize that social progress takes longer than commercial success, and be transparent with other investors about this. Conveying the full complexity of challenges helps set realistic expectations and helps cultivate repeat investors.
Reward those demonstrating metrics-driven results with additional funding. Advancements in measurement make it easier to fund approaches that yield demonstrable results. Recognize, however, that some will be tempted to game the metrics. With this in mind, solicit input on performance from various stakeholders, and be familiar enough with the business model to ask the difficult questions.
Contribute not just money, but also skills. Omidyar Network provides executive search services. Nigerian investor Tony O. Elumelu has committed his extensive largesse and business acumen to increasing the competitiveness of Africa’s private sector. These resources help social enterprises scale and gain a stronger foothold in new markets. Providing technical assistance that refines a start-up’s business model can also position the enterprise for second-stage financing from additional investors.
Ideate, test, perfect, and expand. Test and perfect the solution before scaling it to a larger population. Rapid iteration allows only the best attributes of the new business to become part of the final model.
Fund replication, not just ideation. Too many investors are only interested in funding shiny new business models. Often, a better return on investment can be achieved by replicating successful models—models tailored to local circumstances—in other countries and sectors. A case in point is microfinance, which has been successfully deployed in many regions.
Ecosystem Level
Take a broader view of markets and ecosystems. The impact of any market-based solution, at its fullest potential, will be achieved by a multiplicity of actors in a given market, and not just within the private sector. Philanthropic funders are uniquely placed to take this perspective and work to enhance the conditions for eventual impact at scale.
Tie funding to issue-based movements and campaigns. Instead of providing financing for standalone efforts (e.g., clean water awareness campaigns), tie “category” financing to specific initiatives (e.g., building water kiosks alongside clean water awareness). Funding multiple, interdependent parts of an ecosystem concurrently encourages organizations to work collaboratively toward shared success.
Aggregate supply by organizing a fragmented set of (predominantly informal) enterprises. Often, a contingent of disparate providers is already serving an otherwise marginalized segment of citizens and the task at hand requires upgrading that base en masse. This will make it easier for large companies and international organizations to collaborate toward shared goals.
Provide basic and shared infrastructure. The success of a new enterprise or model often requires foundational infrastructure of some kind. This may be physical infrastructure, like school buildings; social infrastructure, like cooperatives or other aggregation platforms; or knowledge infrastructure, like rigorous analysis and lessons learned from effective market-based approaches. Recognizing what infrastructure is most needed and making it accessible will help set up the funded enterprises for success.
Dedicate grants to priming the market. For example, the Bill & Melinda Gates Foundation committed a $4.8 million grant to Vodacom in Tanzania to help prepare the market for wider M-Pesa money adoption through awareness and education campaigns.4 Similar to the provision of infrastructure, priming the market encourages the early behavior changes that will be critical to adoption of a new offering.
Spread the responsibilities for risk capital and risk management across a team of contributors. Low-income markets are highly volatile. Donors, investors, and aid agencies are uniquely placed to absorb and share risks. Honest information sharing between early and later-stage investors about the landscape and the enterprise’s performance will help manage risk and preemptively address challenges.
Create and back new specialist intermediaries. Such intermediaries would accept funding from a wide range of foundations and aid donors and develop deep expertise in working with firms pioneering new social business models and steering grant funding their way. Today, there is a critical lack of such specialist intermediaries to connect mainstream philanthropic resources to the practice of enterprise philanthropy, in contrast to the two hundred impact-investing funds that have emerged. US foundations, for example, are required to give away five percent of their assets each year to maintain their tax status. “Imagine if they put another five percent in action into the capital markets [via intermediaries] to make smart investments into social enterprises,” exclaims the White House’s Jonathan Greenblatt. “That’s $50 billion. That’s creating change at scale. That is how you change the world!”5
Cover capital-intensive fixed costs for proven business models. For business models known to work, develop facilities that can support expansion on a much larger scale. This requires funding the fixed upfront capital costs that operators cannot recover at affordable price points (e.g., water kiosks, microgrid generation, microgrid household connections). Also fund the fixed cost of demand stimulation or supplier and agent training—that is, noncapital costs that prevent solutions from operating in a commercially sustainable way.