Thursday, October 30, 2014

New Tools for Impact Investor and Businesses Alignment

The Challenge of Alignment

Both impact investors and businesses seeking impact investments share a strong desire to see that businesses are tri-profitable.  Tri-profitable businesses create the possibility for human and other life to flourish on this planet forever by generating as much tri-impact as possible: financial rewards, social benefits and environmental regeneration.  This shared desire to maximize the tri-impact of business exists because impact investors and tri-impact entrepreneurs fundamentally share the same values and world-view about business: businesses will do best when they do good.

Based on their shared desire for tri-impact:
  • Tri-impact entrepreneurs are driven to choose strategies and design their operations to be tri-profitable,  and
  • Impact investors are incented to allocate capital (debt, equity or hybrid forms) to investments where they expect both to receive a financial return (ranging from return of principal to market-beating returns) and a defined additional social and/or environmental impact.  
In other words both are intending to act in alignment with their shared values. 

But, what we're learning in our conversations with impact investors is that despite their shared values and intention to act accordingly (and all the goodwill this engenders), there isn't currently an approach for the investor and the business seeking investment to efficiently and effectively carry  forward their shared values to the necessary next level of detail.  In other words there isn't a good way for them to:
  • Gain a shared understanding of the viability and quality of the action the business is planning to create its tri-impact
  • Report on whether the actions, once undertaken by the business, have produced the intended tri-impact.

Impact investors and tri-impact entrepreneurs are struggling to figure out how:
  1. Businesses can know that their proposed action (the design of their business model) is well aligned with the their intention to create tri-impact 
  2. Businesses can share the story of their proposed action in a language that will resonate with impact investors
  3. Impact investors can quickly judge whether a businesses proposed action to achieve tri-impact is sufficient and realistic
  4. Impact investors can sense what risks to tri-profitability and opportunities to increase tri-impact a business has missed, and communicate this in a way an that a business can quickly improve its planned action.
In summary the unresolved problem is: how can the investor and the business to quickly share the action planned by the business in a way that allows mutual understanding and learning while deepening their relationship?  How can they efficiently and effectively determine if they are aligned and have a good fit for each other based on their shared values?

Slowing the Growth of the Impact Investing Market

The lack an efficient approach for impact investors and tri-impact entrepreneurs to deepen their relationship around their shared values creates a range of problems for them both:
  • It takes too long to build confidence - impacting deal cost and deal flow
  • Its hard for businesses to tell inspiring stories about all aspects of their planned tri-impact - profit, people and planet 
  • Its hard for the impact investor to communicate to additional opportunities for tri-impact or additional risks they identify
  • Its difficult to identify a concise set of performance measures and reports to track all aspects of the businesses progress in delivering its planned tri-impact
But there is also a wider impact on society: these problems effectively limit the number of viable tri-impact business opportunities demanding investment, and the supply of impact investments seeking those opportunities.  In turn, this limits the scale and speed of the impact investing market and hence the total quantity of integrated environmental, social and economic benefits being created by business to address today's most pressing challenges created by the ever growing mega-forces of change. 

Challenges of Current Approaches

But don't existing techniques used by profit-priortizing businesses resolve these challenges?  

Unfortunately the two most common existing approached by themselves will not enable the required level of values aligned shared understanding, mutual learning and relationship building via story telling

  • Business Plans.   First there is no agreement on what a business plan that describes a tri-profitable business looks like; every business and impact investor has their own ideas of what's required.    Second, as Alex Osterwalder and Steve Blank have observed, business plans don't enable compelling story telling, they are not conducive for learning, nor are they easy for investors to assess.
  • Reporting.  First, while reporting provides some evidence of tri-impact created in the past, it doesn't give a view of the future that helps assess the quality of the planned actions to create (more) tri-impact.  Second, we don't have an integrated set of reports (financial, social, environmental) that allow rating and ranking by investors.  This is a large part of the challenge our colleagues in the Reporting 3.0 initiative and the Future Fit Business Benchmark project are wrestling with.   As examples: The popular B Impact Assessment doesn't include the financial dimension of tri-profitability, and the Global Reporting Initiative standard doesn't allow comparison since everyone gets to choose the specifics of the metrics they report.   

    Introducing New Approaches

    We think that impact investors and business would find it easier to get aligned on a specific opportunity based on their shared values if they had a shared language to communicate both:
    1. The action the business is planning to create its tri-impact 
    2. The quantity of tri-impact the business is currently creating in the world
    To make this language usable in practice impact investors and businesses also need need tools that use this language to enable them to communicate.  Two tools that have done exactly this are 
    1. the Flourishing Business Canvas, a tool to communicates the action a business is planning to create its tri-impact via its business model
    2. the Future Fit Business Benchmark, a tool to communicate the quantity of tri-impact a business is currently creating in the world.
    Let's explore these two new tools and how the solve the problem of developing values aligned shared understanding, mutual learning and relationship building via story telling between impact investors and businesses.

    The Flourishing Business Model Approach to Describing Planned Action

    Business models are a language shared by investors and business to describe action a business is planningIdentifying the elements of a language and collaborative visual design tools to describe and design financially viable business models was the amazing contribution of Alex Osterwalder in his million selling book "Business Model Generation".
    But impact investors and tri-impact entrepreneurs need an expanded language for business modelling that includes not only the elements of financial viability, but also a full conceptualization of tri-profitability and the root enablers of the possibility for flourishing. 

    To find these root enablers for flourishing we must look to the natural and social sciences to inform our understanding of the elements required to describe a tri-profitable business model.  In our recent research we developed a solid understanding of the relevant science and used this to develop the shared language of tri-impactful business models.  

    We then developed the Flourishing Business Canvas as a visual design tool using this language (you may have heard us talk about an earlier version that was known as the Strongly Sustainable Business Model Canvas).  We're also using the same understanding of the root causes to  describe "design principles" for flourishing business" which can help businesses design their business to create the most tri-impact now and in the future. 

    We believe that by providing a shared language for impact investors and businesses a flourishing business model approach adds an efficient and effective means for:

    1. Businesses tell powerful stories to impact investors of the actions they plan to take to create tri-impact.   A flourishing business model clearly identifies the necessary and sufficient hypothesis for all the planned actions to create tri-impact: outcomes, value, stakeholders and processes) 
    2. Impact investors to communicate risks and opportunities in the same language the business already understands and can directly act upon (its not easy for a business person to figure out what to do differently from a report - its much easier from a business model)

      The Role and Importance of Reporting

      But having a shared language to describe flourishing business models, the actions a business plans to take in the future to be tri-profitable, is only half the story.

      Once an investment has been made by an impact investor in a business, both parties are keen to know if the flourishing business model they now share an understanding of is in fact creating the  tri-impact they both desire.  

      To do this we believe the business should report its performance based on the same understanding of the root causes of tri-profitability used to describe its flourishing business model.  By doing this the reporting becomes a key part of a powerful learning feedback loop for both business and impact investors.  We believe this returns reporting to its role as a powerful shared learning and decision making tool - as suggested by the Total Quality Management movement (Dr. Edwards Deming) in their now famous Plan, Do, Check (report), Act continuous improvement cycle. 

      But what business performance reporting system is based the same understanding of the root causes of tri-profitability as the Flourishing Business Canvas approach?  While the B Impact Assessment is well aligned with the underlying science, to our knowledge to date only second project we're involved with, the Future Fit Business Benchmark, uses this same understanding of the same science to build its KPIs and goals. 

      Symbiotic Approaches

      The following diagram shows how together the Flourishing Business Canvas and the Future Fit Business Benchmark are symbiotic approaches to help businesses achieve tri-profitability and maximize their tri-impact.

      Symbiotic Initiatives to Enable Tri-Profitable Business:
      The Flourishing Business Canvas and Future Fit Business Benchmark


      We'd like to invite you to explore how impact investors and business seeking impact investments can use this new language of tri-profitable, flourishing, business models and reporting to more efficiently and effectively achieve alignment based on their shared values.  

      If you're interested in learning more about this topic please check-out

      Wednesday, April 23, 2014

      Sustainability Thinking... THE Driver for Resiliently Profitable Innovation

      Why Current Approaches to Innovation Aren't Working

      Many CEOs, are struggling to connect sustainability / CSR / Green with innovation and improving profitability.  This 2013 Accenture UN Global Compact survey highlights how many don't yet see how much the world has changed.  CEOs increasingly know why sustainability is important, but they largely don't understand the deep connection between sustainability thinking and solving their increasingly pressing innovation and profitability problems.

      Innovate Profitably

      But we also know CEOs are only part of the innovation culture and process in any organization. For example, embedded in that culture are the "profit-first" approaches to problem solving, innovation and increasing profits taught in most business schools world-wide for the last 60 years. 

      These approaches assume that the only sources of innovation are those that directly focus on reducing costs and increasing revenues - regardless of longer term impacts, externalities and "unintended consequences".  Indeed applying these old approaches will increasingly harm business performance, unknowingly exposing business to additional risk.

      So what has changed? Why have the traditional approaches to innovation become "old school", unreliable and risky? What has changed is the ever growing impact on business opportunity and risk of the "global mega-forces of change". The global mega-forces of change and opportunity all come from outside this typical profit-first business sphere.  Mega-forces such as climate change, energy, population, materials and water scarcity, wealth and income inequality, and food security. As a result, these global mega-forces are ignored by "old school" approaches. They are a new and largely untapped source for innovation and profitability.

      Start-ups, small, medium and large businesses, such as those mentioned in the reports at the end of this post, are already starting to out perform in their markets because they are now tapping into this new source of resilient profitable innovation.

      Manage Risk

      Further, because the "old school" profit-first approach to innovation systematically ignores (or worst denies) the mega-forces as a valid source of inspiration, the material risks created by those same mega-forces are also ignored. This means "old school" innovations have unknown levels of monetary and reputational risk for investors, shareholders, and indeed all stakeholders.

      Engage Employees

      Lastly, the "old school" profit-first approach to innovation means employees and other key stakeholders can't live their deepest held human values in their working lives. We are told everyday that only innovations that reduce costs or increase revenues are "good" - even when we know they will harm us, our families, communities, countries and the world - upon which we ultimately depend.

      This creates significant individual barriers to engaging with the "old school" approach innovation. These old approaches create pain as individuals experience the disconnect between their values and what they need to do to undertake their jobs. In turn employees dis-engage, their health is impacted, as is the companies performance, as ultimately the best employees leave (incurring disruption, re-hiring, re-training and reputational losses and costs).

      Future Fit Business - it's Simply Better

      What is a better approach to resilient profitable innovation that manages traditional and mega-force risk and engages employees?   How can a business innovate sustainably so it is resilient and always fit for the future?

      The mega-forces combine diverse economic, social and environmental factors that together create a huge variety of new opportunities and risks. Creating a process of innovation that will systematically take advantage of the opportunities and minimize the risks, through a process of innovation, requires:
      • Understanding these factors and
      • New innovation tools that can help integrate the innovations into new and improved business models.
      Businesses that do this successfully over time will simply be better, becoming future fit.  They will be:
      • Resiliently profitable: They reliably provide genuine wealth to all stakeholders - including a reliable financial return to shareholders.
      • Systematically aware of and mitigate risks from all sources: They resiliently face change from all quarters.
      • Aligned with deep human values: They will have a mission and vision that enables them to behave authentically with all stakeholders, enabling all of them to be genuinely and sustainably innovative.

      As a result, such better businesses proactively contribute to a resilient sustainable environment, society and economy. They create the possibility that human and other life can flourish on this planet forever.

      There is increasing evidence of both the limitations of the old innovation approaches, and the benefits of the future fit alternative (see the items at the end of this post for pointers). Further, there are already 1000+ companies world-wide who are certified as using this approach to resiliently profitable innovation and tens of thousands in wider communities such as the Business Alliance for Local Living Economies.

      Beginning Your Journey

      How do you begin on your journey to resilient profitable innovation?

      Our Strongly Sustainable Business Model Canvas is a tool that helps companies learn about the impact of the mega-forces on their current business, diagnose current innovation challenges and design new and improved business models. This tool was created to systematically enable you to see the risks and opportunities that arise from both traditional sources of innovation and the mega-forces.

      Using the canvas to innovate over time ensures that the connection between sustainability, innovation and stakeholders' deepest values are baked into the heart of your business. As a result your company can become authentic and resiliently profitable: able to sustainable innovation in the face of the ever increasing mega-forces.

      Measuring Your Progress

      How do know if you are progressing on your journey to resilient profitable innovation?

      We recommend two approaches, depending on your information and other needs:
      1. B Lab's Benefit Corporation Impact Assessment and Certification are currently the best way to quickly find out if you're doing a good job of leveraging the innovation opportunities and avoiding the increasing risks of the global mega-forces, all whilst remaining profitable. 1000+ companies world-wide have found that the impact assessment is also a tool for demonstrating your progress publicly. This, in turn, can help attract new customers, innovative financing and other innovatiave stakeholders.
      2. The PROMoting Business Excellence (PROBE) network's benchmarks for Sustainable Business and Innovation Excellence gives you a detailed comparison of best practices against current practices.


      To explore how you can begin this journey for your business please see BetterMy.Biz - a collaborative initiative of a number of companies, including Edward James Consulting Ltd.

      If you're interested in learning more about this topic please join the 250+ practitioners and academics in the Strongly Sustainable Business Model Group, hosted by the OCAD University's Strategic Innovation Lab.


      Evidence to Support our Thinking

      There is increasing evidence of both the limitations of current innovation approaches and the significant benefits and opportunities of the future fit alternative:
      • Expect the unexpected: Building business value in a changing world. KPMG International. The key chart from this report is Fig 49 on PDF page 133. It lists the global mega-forces of change, and the resulting risks and opportunities that are missed by the "old school" approach to innovation.
      • Committing to sustainability with Unilever, a ~4min video recorded by McKinsey & Company with Unilever CEO Paul Polman. In this video he concisely and powerfully makes the connection between Unilever's improving profitability and the innovations inspired by sustainably thinking - including the impacts of the global change mega-forces in all tactical and strategic planning.
      • The New Sustainability Advantage by Bob Willard. This book identifies the 7 elements of the financial business case for a Better, Future Fit, Business. Dr. Willard documents how better businesses can improve financial profits by 50% within 3-5 years while simultaneously reducing risk - and all this by only implementing existing proven practices already implemented by others. 
      • Make the Case for Business Sustainability by the Network for Business Sustainability (NBSNet) that "regardless of industry or organizational size, this site will help understand how to create value through sustainability."
      • Culture of Purpose: A Business Imperative. Deloitte. A new report that suggests purpose drives profit and confidence. Nicely summarized in this Forbes interview with Deloitte' CEO
      • Sustainability Driven Innovation: Harnessing Sustainability's Ability to Spark Innovation. Deloitte. The report Intro States: Sustainability and innovation go together. Our research has shown that companies that pursue sustainability significantly increase their chances of becoming innovative leaders in the process.
      • Breaking Through: How Corporate Social Innovation Creates Business Opportunity.  KPMG Canada, Volans, and Social Innovation Generation.  "Today, many business leaders realize the challenges facing our society can adversely impact business. And more broadly, businesses can make a powerful contribution"
      • For Companies, It's Not Easy Being Green. Booze + Allen / Strategy + Business which summarizes much of the recent academic research related to the connection between Green / CSR and Profit. "Leading companies that have implemented sustainable initiatives along their supply chains have seen a corresponding boost in their financial performance. But there's no reward for a half-hearted implementation"
      • Are You Ready for the Resource Revolution. McKinsey & Company. This article summarizes a book about the risks and opportunities of the materials scarcity mega-force. There is a short video of this article here.
      • Capturing Leadership Positions & Catalyzing Innovation using Sustainability. The Natural Step Canada. A video of a webinar run by our friends at The Natural Step Canada which explores the application of the Framework for Strategic Sustainable Development (FSSD) to business - to enable businesses to capture a market leadership position and catalyzing innovation
      • Remaking the Industrial Economy. McKinsey & Company. A report and collection of articles about a "regenerative economic model-the circular economy-is starting to help companies create more value while reducing their dependence on scarce resources." Of course all this requires a huge amount of innovation of all types! 
      • Meet the Aspirational Consumer.  New research from BBMG and GlobeScan identifying a new fast growing consumer market segment "who are driving innovation, business growth and positive impact".  Good introduction to this research in this recent Fast Company article 5 Secrets To Engaging Aspirational Consumers.  
      • The Impact Generation Has Arrived.  New research from Deloitte "Millennial Innovation Survey" talks to the changing expectations of business that milliennials have as they become customers, employees and investors.  As this Forbes article concludes "Should we not look to the power of the free market for help solving our problems like public health and climate change? Over the next decade, society will demand that the business community address, or at least respond, to these issues, and the businesses that do so will reap the greatest returns. They will do it through better customer loyalty, a higher-skilled and more motivated workforce, and a lower cost of capital. For investors, that is a winning combination that spells impact."
      • Not Business as Usual. A feature length video featuring case studies of small and medium sized companies adopting the future fit approach to resilient profitable innovation.