leverage

Counting the beat

calculator

With numbers, leverage matters more than materiality.
‘Data-driven decision making’ is only better if you collect and merge the right kinds of data.
Sometimes you need a stand-alone crystal ball, not a fully-integrated computer system.
Absolute value changes and percentage changes; like heads and tails on a coin. You need both to get the full value.
The plural of anecdote isn’t data.
Accountants count the cost, when strategists fail to differentiate themselves.
Behind most good text and noble speeches are great numbers.

Leverage – can it help to reframe the business problem?

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Leverage

Charities, Impact & Leverage

I recently read an interesting interview on the New Philanthropy Capital website (www.thinknpc.org), with David McCulloch, the Chief Executive of the Royal Voluntary Service, talking about charity impact and some future trends for UK charity funding.

http://www.thinknpc.org/blog/the-time-is-now/?utm_medium=email&utm_source=New+Philanthropy+Capital&utm_campaign=4722080_3nd+eshot+Annual+Conference+Oct+2014-+September&dm_i=UL9,2T7KW,5JWQUY,A7PDC,1

Mr McCulloch said that ‘the challenge (of charities measuring and evaluating the effectiveness of what they do) is really what to measure and how.’ My own take on this is that impact is a three legged stool – impact outputs, impact outcomes and impact communication. Charities who want to be effective, therefore need to report not only impact outputs, but stretch to reporting impact outcomes as well. And unless they are able to communicate impact back to donors and to potential donors, as well as their own staff & other stakeholders, then a significant portion of the value of impact measurement is lost. It follows that a charity won’t be perceived by donors/potential donors to be as effective (as it could be), if it manages what it cannot measure, if it prioritises what it cannot measure and if it bases its goals & strategies on something it cannot confidently measure. Perhaps some future charities will design their scope around being impact-led, but only where impact can be confidently measured.

Arguably, impact communication, like political speeches, is as much about reaching heads as reaching hearts.  Impact communication and impact outcome-reporting also needs to overcome two challenges. Firstly, of an extended value chain (where the charity donor or ‘principal’ providing the funding, perceives themselves as being too many steps removed from beneficiary results in the field). And secondly, of a concurrent value chain (in a disaster-relief setting, where multiple charities provide different forms of aid to the same beneficiaries, with multiple charities jointly saving lives and rebuild societies, but making discrete impact measurement more problematic).

New Philanthropy Capital, in the same interview stated that ‘charities have to work out ways that are proportionate to their size and resources.’ Mr McCullock’s response was that ‘it’s about measuring the thing that will best demonstrate your impact’ and that ‘new services are sometimes the best place to start.’  My take on this is that perhaps charities need to use leverage more routinely to avoid the constraints of their size and resources, to achieve the impact they seek. Does enough time get spent by charity senior management examining what and how leverage can be used to achieve charity goals? Furthermore, for an established charity, rather than measure impact on new services as they are developed, why not re-define all services in the context of what impact can be measured, since arguably impact is to charities what share price is to companies.

For substance-abuse charities, one aspect of leverage is examining how existing sufferers can help beneficiaries, since their credibility (deterrence and rehabilitation) is probably higher than for charity workers. Can sufferers help other sufferers, can early-onset sufferers help late-stage sufferers, can rehabilitated sufferers help early-onset sufferers? Perhaps impact is increased by using leverage, since rehabilitated and early-onset sufferers can gain new skills and strengthen their own lives as they help those less fortunate. The role for charity workers in the same scenario? Act as leaders and guides, supplying information and logistical help to the rehabilitated and early-onset sufferers helping others.

What about leverage in fundraising? Are charity resources best used by employing ‘chuggers’ to randomly collect small change from people on the streets? Why not instead invest on online business models to profile and solicit funding from wealthy individuals instead, linked to impact measurement and compelling storylines that target both head and heart?

What about exploiting charity leverage using a different business model – should small charities switch to mimicking SME start up business models and digital start up models, with light governance structures, global reach, low to medium upfront fixed costs and very low variable costs?

Lastly, what about exploiting charity leverage by revisiting incentive theory (principal-agent contracts)? Fundraising perhaps needs to create innovative contracts that recognise moral hazard (hidden action) and adverse selection (hidden information) issues for donors and potential donors. Such contracts could explicitly include impact reporting in the terms of the contract, in ways that reassure donors and increase total donor funding. In designing such contracts, charities would have to give more thought to which contracts are one-off or repeat game, which principals are risk adverse (and how), and what additional funding they could get from donors as information disclosure rents.

Materiality and Leverage. Sibling rivalry or dream team?

Some people seem to live by materiality. Critical mass. Mounting a disaster relief effort to deliver the greatest relief for the greatest number. Making a decision on the balance of probability, or the weight of pros stacked up against the weight of cons. Letting the market decide. Judging success by box-office ratings. Judging guilt when it’s beyond reasonable doubt. Judging success on the overall number of votes. Monitoring averages and total magnitudes. Have lots of children, so some will hopefully survive.

Other people seem to live by leverage. Checking if the high profile critic they respect agrees with them (regardless of what the masses think). Using the opposition’s strength against them. Using their assets to their advantage. Choosing to have fewer children, to devote more attention to each. Analysing the outliers, not the crowd behaviour. Saving the last two animals at all costs, to prevent extinction. Leading by example. Saving the World one person at a time -after all, the child they save today may be tomorrow’s equivalent of Nelson Mandela. Einstein or Shakespeare.

In the business world, arguably it’s sibling rivalry. Accounting is rooting for materiality. Strategy, a fan of leverage. Maybe that’s the problem. And the opportunity. Is there a way accountants can see past materiality? And a way for strategists to be better strategists by embracing materiality?

In the entertainment world, arguably it’s sibling rivalry. People try to use every talent they have (leverage) to achieve success. With intense competition, fame can be short-lived and the scrapping is entertainment itself for many watchers.. The dignity in the industry might rise if critics were more generous about the long run performance of the entertainer (materiality).

In the high performance sports world, arguably it’s sibling rivalry – people seek a personal best time (over performance consistency) that exceeds the World record time, using all ethical technique and training effort (leverage).

In the legal world, arguably it’s a dream team. Consumer rights groups campaign by all means necessary (leverage) for improved professional ethics (material improvement in behaviour). Prosecution and defense lawyers do likewise for legal case outcomes.

In politics, it’s a dream team. Politicians use leverage (by all means necessary) to achieve popular support (sufficient votes to be re-elected) ie materiality. Sadly for them, voters use materiality when they can’t use leverage.