Funders Shouldn’t Pigeonhole Organizations In Name Of Illusory Efficiency

When trying to reinvent systems or create new value networks from whole cloth, funders often want small and nascent organizations to focus, focus, focus and stick to their knitting. Rather than fund an organization to vertically integrate, funders see it as more efficient to deploy capital by funding other entities to fill in the gaps in new ecosystems.

The problem with this approach, however, is that it can turn out to be penny wise yet pound foolish.

In The Prosperity Paradox, Clayton Christensen, Efosa Ojomo, and Karen Dillon write that in emerging markets—where value networks are often underdeveloped—to be successful organizations must often vertically integrate their operations in ways “that might seem unnecessary in more prosperous countries.”

Tolaram—the makers of noodles—for example, integrated to supply “its own electricity and built a distribution and retail network to guarantee stable and predictable supply.” That undoubtedly meant a much higher set of expenses up-front, but the alternative was likely failure because the standalone engines of electricity, distribution, and retail were all unreliable at best.

The same overriding principle is true in system reinvention. Just as in emerging markets, my observation is that funders are often overeager to be capital efficient. And that ultimately results in expensive failure.

As a new system emerges, the way its constituent parts interact will be different from that in the prior system. That this is true isn’t surprising. In order to truly reinvent things, the interfaces between different parts from the prior system have to be rethought completely. Which means that the prior categories and boundaries between various organizations may also change.

Parts of the value chain that existed as stand-alone providers in the old system might now need to be integrated and combined in novel combinations with other parts. And the ways in which these parts need to be remixed are often unpredictably interdependent ahead of time.

As a result, when funders fund a range of organizations to provide discreet parts of a new system, they are constraining those organizations in their capacity to innovate and reimagine the system. System replication—which is a failure if the goal is system reinvention—often results.

Instead, these new organizations need to be able to stretch across boundaries and control all the various components that matter for performance in order to make the new system work well and in novel ways.

As organizations push on different parts of the system from their specific corners, they undoubtedly will bump into other parts of the system that also need to be reinvented. And because how those parts interact won’t be clear or specifiable ahead of time, they need the ability—and funding—to stretch into those other areas.

Take the organization Transcend. Its roots are in partnering with communities to redesign schools. But as its done its work over the years and sought to have that work both stick and scale, it has vertically integrated to work in other areas of the systems reinvention work with other organizations.

Its first set of scaling work is around opening up its design supports to a much broader array of entities that can’t necessarily engage with Transcend’s bespoke design work. The work involves three things: open-source tools and resources that people can use to do the design work themselves; the launch of a national community with over 12,000 schools, systems, educators, and design supporters to support people as they use those tools, and then an education program called the Transcend Institute to train and certify district and other non-profit staff in the work Transcend’s employees do.

All of these resources must evolve in an interdependent fashion as Transcend learns and improves its own core work. Without offering all three of these components in an integrated fashion, the change that results won’t stay up-to-date with the best information that Transcend has and at the quality bar that Transcend offers.

The second set of integration Transcend has done is around moving to address the policy, funding, and leadership barriers that exist for undertaking the sorts of innovations Transcend helps school communities design.

As Jeff Wetzler, co-CEO of Transcend, told me, “We’re never going to be a policymaker or even an advocacy organization. But what we’re finding is that there’s one unique asset that we have that’s quite helpful to all of those different things, which is the proximity to the communities that we’re working with.”

That proximity allows Transcend to partner with and inform other policy organizations to know just what policies need to change to unlock progress. As Wetzler said, “For example, we’re working with dozens of schools in one specific state, in partnership with the agency that oversees K–12 education. And because we have relationships with both levels, we’re able to go to the agency and say, ‘Here’s the tweak that if you made it, things would actually be far more innovative on the ground.’ Similarly, we do an increasing amount of stuff with funders who want to understand what models and supports schools are actually demanding.”

Having this policy and leadership work be interdependent—as opposed to arms-length and controlled by another group—with Transcend’s design work is critical to surfacing novel insights as it learns more on the ground and continues to innovate and improve with its community and ecosystem partners.

As the new learner-centered systems that Transcend is helping design crystallize and become clearer in the years ahead, perhaps it could move away from being vertically integrated. But until how the different elements in this new system interact are predictable, specifiable, and verifiable, moving to a modular system will be premature and shortchange the work.

Although it takes more patience perhaps to fund such vertically integrated organizations, if the goal is the creation of a truly new system, funders need to forget about efficiency in the short run to gain real impact in the long run.