Kuva: Minna Hemmilä

Published December 30, 2019

#4 Ten tips for an effective impact

Impact-based investment and social impact bonds (SIBs) are still in their early stages in Finland. However, experience is being accumulated all the time. The list below reveals the most crucial lessons and recommendations from over the five years.
Writer
Business consultant, Founding Partner at HNY Group, HNY Group Oy

The recommendations to the parties involved in an outcomes-based financing agreement or SIB agreement have been compiled on the basis of interviews, from Sitra’s publications and from a summary of interviews with municipalities and officials carried up in the spring of 2019. Views were also expressed by the treasurer, FIM Impact Investing Ltd’s director Jani Kempas; the City of Lohja’s Director of Welfare, Katri Kalske; and training and expertise firm Live Palvelut’s Development Director, Miika Keijonen. The asset management company FIM is involved in all outcomes-based financing agreements, that is, the SIB projects; the City of Lohja is launching the Children SIB; and Live Palvelut is, among other things, promoting employment in the Integration SIB that aims to promote the integration of immigrants.

Recommendations

1. Develop modelling

Modelling is a tool for creating shared understanding of those economic and operational starting points that create the frameworks for impacts and, in the longer term, for effectiveness. SIB modelling features three stages: 1) social benefit modelling; 2) impacts modelling; and 3) operational modelling. The use of modelling also makes it possible to specify the indicators required for effectiveness monitoring.

Modelling depicts how the objective will be achieved and is carried out at different stages of the impact chain. The aim is to show that the impacts achieved have actually been generated as a result of the work carried out, and not (for instance) merely by chance.

With modelling, the aim is first of all to describe and clarify the current situation, and to find out what could be changed in order to achieve a greater impact. One example of this could be how the City of Hämeenlinna started to investigate the increase in child protection expenses and discovered the point at which intervention would probably be worthwhile.

2. Draw up clear targets and indicators

Results are only achieved via targets and objectives. For example, the objective of the Integration SIB is to help immigrants to find work quickly. In this programme, participants can also learn the Finnish language and skills for working life, and also obtain guidance and training for working life in accordance with their own needs. Even so, the sole objective of the programme is employment. If, for example, the learning of Finnish was a target, the activity could take on the wrong emphasis, stressing not actual employment but rather language learning. This lesson has been learned by, for example, Live Palvelut, one of the Integration SIB’s service providers. The outcomes target must be clear and be approved and recognised by all parties. If the targets and objectives are unclear, it will be hard to assign indicators.

The use of social benefit modelling can make it possible to specify the outcomes targets and also the indicators required for effectiveness monitoring. Indicators can also be set after the targets have been determined. Indicators, too, can be further developed where this is necessary. These show how the SIB project will lead to an effective and long-term impact.

Measurement is essential. A wrong indicator will tend to lead to the wrong kinds of outcome. If the aim of the SIB project is employment, then the indicators will measure the success of people finding jobs. In the Well-Being at Work SIB project, for instance, the selection of indicators was one of the project’s stumbling blocks. The public-sector organisations and service companies involved learned that indicators and targets need to be aligned in the same direction, and that the baseline situation of the organisations needs to be properly examined.

In addition to outcomes indicators, it is also a good idea to utilise operational guidance indicators, which assist in the correct allocation of resources, and process indicators, which are useful when evaluating the quality of activities.

3. Report, describe, draw up examples

As an aid to decision-making for new projects, municipalities and effectiveness service providers need information on the outcomes of previous SIB projects. If there is no evidence of outcomes, the municipalities will have less interest in proceeding with the creation of new projects. Lack of outcomes will weaken the credibility of SIBs and impact-based investment. Consequently, results ought to be highlighted and described. It is worth remembering, however, that the various SIB projects are different. The targets and objectives of some projects are such that their outcomes will become apparent only after some years have passed. Before then, however, lessons can be drawn up; for instance, how the planning and implementation of the projects proceeded, such as at the modelling stage.

If people fail to understand the importance of effectiveness, or how impact-based financing and SIBs work, then they will not initiate new projects. Essential questions include the following: How has the situation in Finland been genuinely improved via impact-based investment or the SIB model? Why is it a good idea for the performance of anticipatory and preventative work to be founded on an outcomes basis? What sort of outcomes can be achieved with the SIB model?

In a SIB project, from the viewpoint of municipal officials the hardest things to understand are the financing model, accounting and investment logic: How does the cash flow? How does one interpret mathematical cash flow statement equations? One big challenge is how officials can justify to decision-makers the payment of a bonus to investors, and what this all means (for instance) from the viewpoint of the residents of the municipality. In the service provider organisation, on the other hand, the important thing is to teach people to understand what the provision of impact-orientated services means: Why are effective services provided? What are the desired goals of effective services? What is achieved by these?

It is a good idea to run through the challenges that have emerged in the projects, so that others can prepare for these in advance. In order to avoid municipalities remaining on the defensive in their discussions with investors, it is a good idea to prepare officials and decision-makers for working together with investors.

4. Reserve the necessary time

When a SIB project is launched, it is advisable to reserve lots of time, particularly in its early stages. Doing anything new requires patience. Adapting to new things and new approaches takes time. If the timetable is too tight, the project may go wrong. As the project progresses, people must be ready to change courses of action if the means chosen turns out to be ineffective.

5. Engage in co-operation

Engage in co-operation wherever possible. All responsible nominees appointed to each SIB project by the public sector, the service provider and the investor must offer their participation and commitment. By working together, they can, for example, create practical tools. From the aspect of success, effective co-operation between the purchaser of outcomes and the seller of services, and/or the public-sector organisation and the service provider, is crucial; they work together on their joint project in order to achieve an impact. If both sides only care about their own “domain” and there is little interaction, things will not progress.

6. Choose the right people for the right posts

In order to implement a SIB project, it is a good idea to choose people within the organisation that are genuinely interested in the matter in hand. Once experts have been selected, it is advisable to give them the authority to manage things in the way that they deem best. Time needs to be allocated for specific work, and old practices and duties need to be eliminated for the sake of the new ones. The experts are messengers. They also prod other people in their organisation towards changing their ways of thinking. Even if one person is appointed as the person in charge, all responsibility for action should not be loaded onto his or her shoulders – “many hands make light work”.

7. Support practical experts and decision-makers

A public organisation, for example a municipal authority, must also provide an adequate description of the SIB project both to officials and trusted parties at the committee level. The management must support practical experts and hold open discussions regarding effective services with the entire organisation, and – in the municipalities – with the residents, that is, the taxpayers, whenever questions arise. The same commitment applies to service providers: with Live Palvelut, for example, which is involved in the Integration SIB, effectiveness is the main objective of the entire organisation, and the aim is to create this as part of all activity.

8. Allow the process to live and breathe

In the case of effective services, the process cannot be set in stone. Procedures need to evolve. Experts must be prepared to change their approach, and to amend the process. When problem points are found, these can and should be corrected immediately. The goal should be to link up “effective services thinking” as part of everyday life and everyday activity. This will be made easier if, for example, the impact-related targets are taken into account in the experts’ own targets.

9. Encourage research

Aim to increase research into SIB projects and into effective activity in general. The research will increase awareness of what is worth investing in, and how. Ensure that high-quality research on SIB projects is carried out at state research institutes or universities. SIB projects are accurately measured, and so they offer good material for research and help to increase understanding of effectiveness and knowledge-based management. Research also provides new information on the results of anticipatory and preventative measures.

10. Increase knowledge-based management approaches in municipalities

Many of the difficulties in SIB projects relate to the fact that municipalities lack data on the impact of their own services. Searching for, and adding to, data can be an onerous task. Utilisation of the SIB model, and the associated simulations, will be facilitated if the municipalities have access to better data on their activities.

Three viewpoints on SIB projects

Jani Kempas, FIM

Fund operator hopes for productisation

“In a SIB project, the treasurer FIM or some other fund operator will create an investment product, generally a fund, out of the project. FIM is responsible for the selection of outcomes-based agreements for financing and for financial modelling of the activity, and will negotiate the content of the agreement, including the performance fee, with the public authority. The budgeting for the project and the service provider contracts are the responsibility of the fund manager.

We have held extensive discussions with investors and officials regarding the specification of this division of labour. Fund management and fund risk management require a licence, and other parties are not allowed to carry out this work. On the other hand, subject experts can be given responsibility for administration.

Up to now, the part of the fund manager has not been financially viable, and the time spent on the projects has not yet paid for itself. However, we believe that after teething troubles we will make the activity financially viable as well.

SIBs ought to be commodified so that municipalities can be offered packages where the costs are specified in advance. As yet, we are nowhere near the commodification stage. Added value will not be generated if we end up having to do lots of background calculations and work each time. It will be difficult if all the SIBs are different and always require a new team to be hired.

In the world at large, investment in SIB-type products is made, in particular, by wealthy private individuals whose motive is different from that of professionals. In Finland at the moment, it is only professional investors that are allowed to invest in SIBs. This is a pity, since we are repeatedly approached by non-professional investors who wish to invest in SIB funds, but this is not yet possible.

We are engaged in discussions with the supervisor regarding enlargement of the target group to include non-professional investors, and we are trying to find a solution to this that will satisfy all parties concerned. However, what is involved here is a poorly understood and conceptually complex product, and the supervisor is understandably worried about the status of the investor.

The public authorities feel the need for “sparring” and modelling assistance for the determination of suitable projects, since they are not used to this kind of procurement mechanism. FIM cannot act as such a “sparring partner”, since we are sitting on the other side of the negotiating table. If we wish to make this type of procurement model more widespread, then we need a third party – a consultant that is trusted by the purchaser. Up to now, Sitra has fulfilled this role. The municipal clients need lots of time.

With the help of modelling, we can convince municipalities and politicians how expensive problems are once they manifest, and that advance prevention is worthwhile.

Hopefully, these will not always be “forceps deliveries”, in other words, achieved under pressure. In the end, however, this ought to be acceptable to everyone.”

Jani Kempas
Director, Impact Investment,
FIM

Katri Kalske, City of Lohja

Financing model is a challenge to the city

“Here, we are launching the Children SIB, which we have been preparing for a year. As the branch manager, my basic duties are concerned with promoting the well-being, everyday convenience and quality of life of the municipality’s residents. The objective is to give support to families in good time before problems have become so acute that expensive remedial services are necessary.

From the viewpoint of the city officials, the most difficult thing is to understand the financing model, in other words, the accounting and investment logic, how the cash flows and what the complicated mathematical cash flow statements are all about. We have, in fact, found it quite hard going. The challenge has been to justify to the decision-makers why we are paying the investors for outcomes.

In the Children SIB, we pondered how families will be selected as targets for investment, and on what criteria. It has not been easy to get this right. We try to pick families that would be highly likely to end up under the provision of serious child protection services.

The support of our co-operation partners has been a material factor in our success so far. The municipalities would not have accomplished this under their own steam.

Officials need to present things in a simple form to the decision-makers. They need to understand that we are making savings, in the sense that expenses are prevented from arising. Even I needed to summon FIM’s co-operation partners a couple of times, since I hardly understood this myself.

The party that signs an SIB contract has great responsibility in the municipality, since we are talking about large sums of money here. We have knowledge and understanding of how social exclusion develops, and we recognise the risks. We have a strong “feel” for what ought to be done differently. I believe that we will succeed in finding the correct families.

We are eager to move forward, since we had the contracts ready last spring. We would have liked to have got underway as soon as the summer was over, but as it happens we will only get started after Christmas. The autumn has been taken up with training the city’s own employees. There is no need to hurry.

We have been actively engaged in communication with the residents of the municipality. The feedback has been positive. A local firm has invested in the fund, and this has been viewed positively, since it is eager to take responsibility for the community.”

Katri Kalske
Director of Welfare,
City of Lohja

Miika Keijonen, Live Palvelut

Service provider concentrates on one objective

“When we started with the Integration SIB three years ago, no-one knew how SIBs were implemented. We had comprehensive discussions with the project funder Epiqus (now a part of FIM), the Uusimaa Employment and Economic Development Centre and other service providers.

We have no other objective apart from employment, even though we offer, for example, language training. Unless the demand for employment is literal and explicit, and unless it is the most important objective, the activity will start to be steered by other matters.

Our approach has been to guide clients on an individual basis. Now, we have not compromised this approach, but it is done in a team. Previously, we worked on a one-to-one basis; now, we work with individuals as a team. The more we have worked together, the clearer our work has become. The team has had to ponder the question of what the best approaches are. We have debated the scalability of the work.

We also gave one member of our team the opportunity to concentrate solely on the creation of co-operation with businesses. This person establishes contacts with businesses for us, and the rest of the team bring clients to them. In this way we have highlighted the needs of business clients; in other words, what these companies are looking for. It is clear to everyone that our sole objective is placing people in work. We aim to make people aware of the importance of work and social participation. Our goal is for the greatest possible number of people to find their own place.

This year, our work has been extremely productive. The placement rate has been 59 per cent, whereas in the Integration SIB as a whole it is about 50 per cent.

The Employment SIB is now commencing, and there is a high level of confidence on both sides. We have learned lessons in partnership with the Employment and Economic Development Office, and it has not been as easy as we imagined, since an outcomes-based financing agreement is something new to the public sector. Fortunately, there are people at the Ministry of Economic Affairs and Employment who have believed in this and have assisted in the progress of the Employment SIB. Their confidence has given us the authorisation to do things in a new way.

Out task in society has been supporting and helping people who need help, and who face challenges in moving forward independently. This is the group that we support. Our operatives must assume responsibility.”

Miika Keijonen
Development Director,
Live Palvelut

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