Social Enterprise is a Disruptive Innovation

A social enterprise is a business that uses the market to solve a social problem. Far too much is made of this elusive adjective - "social". There are two ways to think about why we created social enterprise. The first is to understand social enterprise as a re-purposing of business to achieve a non-business goal. The second, and more compelling, is to understand social enterprise as a disruptive innovation that addresses the failure of financial enterprise – the failure to provide value beyond profit. I am a Capitalist because I believe the market is the only engine available that can power the change we need; however, the market has also been at the center of creating the problems we need to solve. This is why I see social enterprise as a disruptive innovation focused on providing value beyond profit and illuminating the abuses of its predecessor - financial enterprise.

For this disruption to happen we must be able to define and recognize when value beyond profit is delivered. This value is very specific to the market failure being addressed. The fact that our children don’t have quality education; are sick; are hungry; are poor is a market failure. It is valuable to eliminate poverty. It is valuable to eradicate disease but how do we know when this value is delivered. We used to think that good could be quantified as an aggregate value – sort of a social GDP – but experience has taught us that there is no universal unit of good. We have also learned that good is not a return as in social return on investment (SROI). Good is a product.

Our comfort and familiarity with financial enterprise creates a gravity that pulls us towards profit focused tools and measurement. Financial services are successful when they have a huge financial return on investment. Because social enterprise is not as lucrative for the investor we invented a social return to be added to thefinancial return to create a total return on investment. This is silly. If the investor gets a karmic boost from investing in a social enterprise that is because the investor is human and understands that humanity should be served in the context of enterprise. Humanity is served by providing products that deliver value beyond profit. In the case of social enterprise, humanity is served by eliminating poverty, providing education and eradicating disease. These are businesses – it is just business.

So, now we have the logic set. Investors invest in businesses. Businesses sell products that earn revenue – enough revenue to pay the investor for the opportunity to use her money. And products provide value – value that is realized by the customer. This is really stoopid simple but the usurpation of love by profit has clouded our thinking. Look at health insurance, fossil fuels and agri-business. In each of these domains businesses have sought extra-market power (monopoly and/or political favor) to maximize profit and side-step the need to create supply that responds to demand for a valuable product. Social enterprise is a disruptive innovation because, by definition, social enterprise is focused on delivering value beyond profit – value to the customer.

But I still haven’t answered the question: How do we know if value is delivered? The easiest answer is: If the product is designed to deliver value and the customer pays for the product then the customer is receiving value verified by her willingness to pay. Given that this logic is the exact same for any product, while it is compelling, it is not good enough. It is incumbent on a social enterprise to demonstrate the value of its products relative to the market failure being addressed – relative to the problem being solved.

Management is Measurement

A tremendous amount of noise has been made about Impact measurement in social enterprise. Much of the noise has been driven by philanthropists and investors who want to know their money is put to good use. This is reasonable. However, because we have not created a way to understand social enterprise success, investors ask to see that their money paid for work that caused a positive change – that caused impact. (And everybody nods their heads and says: “that seems reasonable”.) Unfortunately, it isn’t reasonable. It’s a bridge too far. Establishing causality (ie my product eradicated that disease, my product caused the healthier lives those kids now lead) is too expensive both in terms of direct cost and opportunity cost. But it is a cop out to simply say establishing causality is too hard and leave it there.

It is my belief that the state of the art lies in management, not measurement and the management best practices that lead to social enterprise success defined as delivering value in the lives of the customers are:

  • Practice Customer Capitalism - The twin innovations of Human Centered Design and Lean Startup are great examples of Customer Capitalism management practices. Both provide rigorous methodologies for (social) enterprises to build businesses, products and services that are responsive to the needs of customers. Without going in to the specifics of these methodologies, what they make possible is for a (social) enterprise to use the question “Am I any good?” as a proxy for the question “Do my products deliver value in the lives of customers?” To review: being good for a social enterprise is exactly equal to delivering value to the customer; being good for a financialenterprise is profit by any legal means.
  • Build evidence of value delivery in to your products – Good is product. Good is not a return. A product is good because it delivers value in the life of your customers. How can you “see” that value being delivered? This is the most critical question in business, social or otherwise. If your product is designed to improve education for children then the act of using your product should produce evidence of its efficacy. This is easiest with technology. For example, a Student Information System (SIS) is used to manage the business of running a school – classes, teachers, students, grades, etc. The product should facilitate the management of not just printing transcripts and enrolling students but the best practices for educating students successfully for healthy and productive lives. If this is done successfully then reporting that comes out of this system is not just class lists and transcripts but also evidence of progress towards delivering on the schools intended impact.

The unavoidable conclusion is that profit is a poor and incomplete proxy for success and from the perspective of humanity, we can only understand if an enterprise is successful by understanding if value is delivered to the customer because impact lives in the lives of the customer not in the balance sheet of an enterprise and not in the portfolio of an investor.