Should German Foundations be Operative and Innovative?

Recently, I have found myself reflecting on an interesting phenomenon that I observed interacting with various German foundations and listening to the various discourses in this sector. Foundations in Germany seem to nurture an ambition of being “operative,” and increasingly strive for being seen as “innovative.” Foundations increasingly adopt “modern” business rhetoric, including terms such as “operative,” “entrepreneurial,” “innovative,” “disruptive,” or “resilient.” I argue that this development is counterproductive. Adopting ambiguous terms that have no clearly defined meaning diverts foundations from their operative objectives. Instead, foundations should ask a very simple but central question: “How can we as an organization create value?”

In this article I convey my initial thoughts on this matter. I also want to clarify and propose a value-creation-logic for foundations that may overcome two problems inherent in their ambitions: i) the illusion of competency: the fallacy of wanting to be “operative” while discounting what it actually takes to operate and deliver solutions to society’s problems, and ii) the illusion of understanding: the fallacy of overestimating the ability to comprehend the meaning of a term such as “innovation.” This has the potential to risk treating “innovation” as an ideology: innovation is good, the more the better. Both of the above “illusions” prevent organizations from being effective.

For more than ten years, I have been researching a number of organizations that effectively execute solutions to complex development problems. I have studied these organizations mostly in countries with massive social and environmental problems such as India, Bangladesh, Egypt, and Brazil. Interestingly, our collective perception of these organizations has visibly changed in the last decade. On the one hand, they still operate mostly in the same manner after all these years. On the other hand, they were recognized by people such as Bill Drayton from Ashoka or Klaus Schwab from the Schwab Foundation who told them: “You are ‘social entrepreneurs’. You are ‘change-makers’. You are the ‘new heroes’.” Today, the same organizations that I met ten years ago are now “social enterprises,” “disruptive innovators,” or “frugal innovators.” It seems that every other year a new label is attached to them. We urgently need to instill some realism into this discourse. The best way to do this is to deeply analyze how these organizations function.

Together with my colleague Johanna Mair, I have just finished work on a book that describes how these organizations actually operate. Surprisingly, we found that innovation, entrepreneurship, or disruption play a very minor role in their value creation logics. These organizations are not easily distracted from what they do every day: routine work that has been optimized and refined over many years. The extraordinary commitment and focus of their operations creates reliable and dramatic positive impact for vulnerable people and communities. We also found that these organizations heavily invest in the types of things that foundations often wish to reduce – “overhead” – organizational structures, people, and processes that enable systematic learning and improvement.

Learning is an essential requirement for these organizations to build capacity for creating greater value from limited resources. Learning is also necessary to limit failures and errors that might worsen the problems of vulnerable communities. They do not have access to safety nets in the forms of savings, insurance systems, or legal systems. Furthermore, learning is essential for yet another reason: effective organizations do not look at problems from a “solutions perspective.” Instead, they invest time and effort into deeply understanding the problems of people and communities before designing adequate solutions.

These organizations clearly distinguish between technical and relational problems and the implications this poses for solution design. Sometimes, even effective development organizations decide to innovate because their existing repertoire of solutions and competencies is not adequate for tackling a specific problem that they care about solving. In these situations, they tend to enact a form of “soft innovation” – carefully piloting new solutions grounded in a deep understanding of problem spaces. High levels of trust between the organization and local communities facilitate innovation. Trust that the organizations have earned from their reliable routine work and positive impact over long periods. Importantly, we often see that senior management spends a lot of time in the field. They engage with the people they serve closely and at eye level. Managers make a significant effort in experiencing the realities of the poor, understanding their problems, and the effects of the solutions and interventions that their organizations provide. This close engagement with local problem spaces, coupled with strategic continuity, and keeping key personnel for long periods of time, all serve to accumulate tremendous organizational knowledge.

Accumulated knowledge in turn generates sophisticated and effective value-creation processes that are enabled by specialized resources and organizational capabilities. Interestingly, we also found that effective social enterprises invest in structural variety. Many of these organizations resemble “conglomerates,” creative constellations of various for-profit and not-for-profit organizational subunits. The individual subunits provide focus for efficient operation. Collectively, the ecosystem of subunits under one organizational umbrella provides resilience and strategic depth to cater to social problems at a meaningful scale. BRAC in Bangladesh, Aravind in India, or Sekem in Egypt are examples of this creative approach to embedding effective operations in structural diversity.

I believe that foundations, given their particular accumulated knowledge, competencies, and structural characteristics differ greatly from these effective operating organizations. The ambitions of being “operative” and “innovative” generally seem to make little sense for foundations. So how then can foundations best create added value? I see two central mechanisms: First, foundations should strive for getting really good at identifying effective organizations that can really operate and perform. And second, foundations need to learn and deeply understand how these operative organizations tick and how foundations can most effectively support them. This requires that foundations enact a clear and internally consistent value-creation logic that is grounded in an explicit focus on a particular problem space. This focus has three strategically important effects:

  1. i) A clear focus on a problem space coupled with an engaging and convincing narrative helps make a foundation authentic. It provides a foundation with a particular “character,” or even charisma, and a clear set of core values. This facilitates decisions about what type of people to hire: people who are motivated by this particular problem space and are willing to engage deeply with problems and potential solutions. Without this focus a foundation cannot expect to be seen as a reliable and trustworthy partner. It could not credibly provide continuity and facilitate a critical mass of solutions in terms of scope and scale for a particular problem space.
  2. ii) Focus is also required to develop and accumulate knowledge about a problem space. Knowledge about how problems are created, the characteristics and dynamics of these problems, and the barriers that stand in the way of solving them. Absent sufficiently deep knowledge about problem spaces, foundations can never strongly identify the ideas and organizations that can provide effective solutions.

iii) Focus is also required to understand the set of resources and competencies that effective organizations addressing a particular problem space need. Learning and experience helps foundations improve their understanding of these operative organizations and identifying different ways of supporting them effectively. Perhaps foundations therefore, also need more staff that have profound organizational competencies.

Without focus and a clear intent, cumulative learning is impossible. Without learning and improving, foundations will not realize their true potential for value creation. The recent strategic shift of the Ford Foundation in the US provides an illustrative example. In the summer of 2015, the current President of the Ford Foundation, Darren Walker, announced a new strategy for his organization. The strategy is based on a focus on the problem space of inequality. The foundation also decided – after deeply listening to feedback from its grantees – to move their funding priorities towards investing in organizations and not just into projects. As Darren stated: “Time and again, the organizations we support have said that our prioritizing project support, as opposed to general operating support, tends to stifle their work, forcing them to focus on incremental outputs rather than long-term organizational strategy and effectiveness. […] we have decided to invest in organizations as partners—and to give them the kind of trust, flexibility, and additional supports they need to do their best work.”

I am looking forward to engaging in more depth with foundations and social sector organizations in Germany over the upcoming years. A joint effort of critically reflecting on the sector will support finding new ways of improving, realizing the value creation potential of foundations, and the operative and sometimes innovative organizations they support.

Christian SeelosChristian Seelos is the Leo Tindemans Chair for Business Model Innovation at KU Leuven. He is also part of the Hertie School’s extended faculty, a visiting scholar at the Stanford University Center on Philanthropy and Civil Society and an academic visitor at the Said Business School, University of Oxford.

References upon request.