How Financial Models can turn lives around
17 February 2023 | by Russ Wood, Alex Artajaya, and Lance Rubin
Introduction to the co-authors
Russ Wood is Co-Founder and Director of Latitude Network, a social impact consultancy that works across social policy areas including homelessness, mental health, employment, Aboriginal services, and justice. Prior to founding Latitude Network, Russ worked as an executive in the NFP and commercial sectors and as a ministerial advisor at both State and Federal levels of Government having worked for two Cabinet Ministers in that time.
Alex is a senior financial modeller at Model Citizn and has been leading and developing all of the social impact bond modelling projects for clients. Alex has a background in actuarial studies before joining the team. Alex found the modelling projects that focused on social issues far more rewarding and impactful when compared to the traditional business modelling projects and it challenged traditional thinking when it came to scenario modelling for different social outcomes related to many different stakeholder perspectives. This article provides Alex with an opportunity to share his experience with many others looking to expand their modelling skills.
Why did they select the topic and are passionate about it?
Sadly, too many indicators of social and community well-being are not improving across our community. And, in particular, the disadvantage is now well-entrenched in some parts of our community. Involving more rigour in measuring what works and then providing the financial incentives that can guide services to where they will have the greatest benefit must be a part of the solution.
Outcome-based scenarios and modelling have the potential to change lives forever and are one of the many reasons the co-authors have contributed to this article in the series.
Ben Hershey on Unsplash
Topic and context in no more than 3 key points
When you think of turning someone’s life around, the last thing that probably comes to mind is an Excel spreadsheet.
How on earth can a mere spreadsheet turn someone's life around?
Most social programs are designed and built with good intentions but a financial model puts a rigour and discipline to this process by linking the provision of Government funding to where programs can demonstrate measurable results.
The use of outcomes-funded programming, through things such as Social Impact Bonds, relies on a well-built Excel model that can demonstrate the financial value of life-changing social service inputs. These funding instruments have contributed, and are still contributing to addressing: chronic illness; prison reoffending rates (recidivism); homelessness; and mental illness among many areas. Well-known examples exist here in Australia including the Living Learning program, a program that the co-authors personally worked on.
Outcomes-funded programs require three things:
An underlying social challenge that is both meaningful to resolve, costly to leave unattended, and high on the list of things to fix for incumbent governments;
A highly competent service provider that has a track record of resolving this social issue (like youth justice or not completing schooling) that is able to achieve the outcomes that a government is looking to achieve; and
There are investors or philanthropists willing to back this social issue and partner with the service provider and government to make a meaningful contribution to society.
These three elements are brought together through a financial model that takes all these aspects into account, projecting cash flows relating to both costs and savings and providing an indication of the project’s ‘profitability’ at target rates of achievement.
This article is intended to help inspire more social impact initiatives and allow financial modellers to see that their skills can generate really powerful outcomes beyond the generation of profit Work that can have a lasting impact on society is hugely rewarding.
If you had to teach this topic in a class to school kids what key tips would you give them to focus on
Sadly, many people in our community are dealing with real, personal challenges every day - homelessness, chronic poor health, mental illness, or substance abuse.
There are lots of programs that try to address these but we are never really sure whether they work and, if so, what was the thing that made them successful. Just providing those services, without checking to see if they have worked, is only half the story.
We really do need to check whether down the track the service did what it set out to achieve. If the service provided has truly helped, then those individuals won’t need quite so many services in the future.
This means that there will be less money spent on services in the future.
A financial model helps us measure the cost of helping people with those savings that we can make by doing a good job. We can calculate the money we spent and the money we saved - the difference is either a cost or a saving.
What you put in, is hopefully less than what society gets out. If outcomes and society's benefits are bigger then that’s a great story!
What practical steps can people take now to learn more
Many people might think that being a financial modeller really doesn’t provide you with practical skills to help with social issues. But, this couldn’t be further from the truth.
The skills in modelling complex social issues that match costs and benefits are incredibly useful if you turn your mind to it.
Here are just a few of the steps you can take to get on the path to solving these issues:
Read case studies of outcomes-based contracts and programs;
Talk to social service providers about the costs of social service delivery, how they measure their effectiveness, and how modelling skills might be able to improve their outcomes;
Follow groups/professional networks that focus on social impact or outcomes measurement; and
Volunteer to work on social impact programs and specifically in the measurement and scenario modelling relating to outcomes and the costs and benefits under different cases.
Where are good places (links) to find out more on the topic
Below is a list of some websites you can look into to explore further.
How important is this skill in the context of learning Financial Modelling?
To become a well-rounded and experienced financial modelling professional you need a wide range of varied experiences when building models.
Too many financial modellers stick to building models in their chosen field of expertise eg infrastructure, mergers and acquisitions, corporate finance, real estate, or business modelling to name a few.
But truly leading experts in financial modelling can literally model anything based on a given set of assumptions, and logic to calculate the interaction between those assumptions and other data, and ultimately the outcome or output.
By taking your modelling skills outside your comfort zone you truly get to grow your confidence in tackling any domain, not just businesses or commercial projects.
Whilst it’s not essential to branch out early, over time once you have established a solid base of knowledge and experience, the further away you go from that to explore new contexts becomes increasingly more exciting and challenging.
Social impact investing is a great domain to explore for the good of society and generally outside a traditional financial modellers comfort zone.
Social impact modelling requires modellers to consider different outcome scenarios relating to the effectiveness of the social intervention programs and showing how those various outcomes impact governments, society, service providers, investors, and banks.
In addition, though the model focuses on financial data, it is important to take into account that the consumer of the model is not exclusively to finance-literate people. Especially in an outcome-based contract, the model is likely to be used by the service provider to forecast and measure the output. Therefore, being able to design and develop a model that is structured (ideally chronological), intuitive, transparent, and as simple as possible becomes critical for their understanding.
How does all this disruption, AI, and automation talk impact this topic?
Many of the social issues and impact investing programs to address those issues are extremely complex human and societal challenges. They require empathy, patience, exploring a myriad of alternatives when often the obvious answers simply won’t work and creative and critical thinking is required for new pathways.
In these complex interactions between government, service providers, investors, consultants, and sometimes banks or investment funds the ability for AI to add value is fairly limited, for now.
However, sometimes data processing and insight is required for research and other validation activities. This is perhaps an area that AI could be explored further, but often the data is sparse and messy which means garbage in = out. Another possible utilisation of AI is to help the communication of the output of the model thus making it easier for stakeholders to understand and use the model. Only time will tell.
If you want to find out more and follow the rest of the article series be sure to download the Financial Modelling App
If you want to find more information on financial modelling and content visit the Model Citizn website.