For tech firms with city contracts, Philly Fighting COVID is a bad omen for innovation

City governments make commitments to their citizens to deliver services to improve their lives. Sometimes that work is best delivered by employees of that city government. Increasingly, governments with constrained budgets and rising expectations turn to third parties. Of these third parties, some are nonprofits and others are for-profits.

Usually the question of tax status hides in the background. Millions of dollars of municipal budgets around the country, including in Philadelphia, are spent on services rendered by outside entities. That changes quickly when the process breaks down.

In recent weeks, we’ve heard plenty about Philly Fighting COVID (PFC) — and that’s when we started hearing from and checking in with the entrepreneurs and technologists who have spent years developing relationships with the City of Philadelphia and and other local, state and national governments around the world. A common theme: Are we learning the wrong lesson from the failure of an untested startup? Put another way, among his many other alleged sins, did a 22-year-old student just set back a movement of more competitive deployment of city resources?

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What started as an effort by Drexel University graduate student Andrei Doroshin to provide Philadelphians with PPE at the beginning of the pandemic grew into a seemingly promising nonprofit contracting with city government to distribute COVID-19 vaccinations. That quick rise has morphed into a saga attracting national eyes: Not only did the group’s leaders turn out to have little experience in healthcare settings — let alone vaccine distribution — they’ve since admitted to pocketing vaccines to administer to friends, while leaving community members who were registered to receive their doses without appointments. PFC’s shift from 501(c)3 to 501(c)4 nonprofit, as well as the quiet introduction of a for-profit arm of the venture, also raised suspicion.

In almost a dozen conversations this week with CEOs of technology and sciences firms that have contracted with the city, and other socially minded for-profit companies, Technical.ly found that many thought it crucial to clarify that Doroshin and PFC appear to be an exceptional stumble, not a representative norm for what city contracting can look like — as well as, more broadly, an exception to what social entrepreneurship usually stands for.

MilkCrate founder and CEO Morgan Berman told us she was “shocked and disappointed” that initially, the tax-status change by PFC was the reported cause for contract termination, rather than the flag that led to the discovery of their various misdeeds, “as though a for-profit tax status made them not trustworthy.”

Berman, whose company is a certified B Corporation that runs a platform for nonprofits to build mobile apps, pointed out that city government works with for-profit entities all the time. The announcement implies that for-profit entities are of a lesser caliber than nonprofit.

“An organization’s tax status is often given too much weight (or not enough) when what really warrants closer scrutiny is the leadership, expertise, and approach,” she wrote in an email. “It appears that in this case little review was done in these areas or we wouldn’t be spending all this energy evaluating a nine-month-old startup after the damage was already done.”

How a city government relies on nongovernmental entities for services is an important question. In 2019, the City of Philadelphia spent as much on contracted services as it did on its own employees, according to an analysis from Pew’s Philadelphia Research and Policy Initiative. Most of that was spent by the City’s Department of Behavioral Health and Intellectual disAbility Services, which includes servicing residents with mental health and homelessness issues. That year, before COVID-19 existed, $350 million was spent on contractors in public health. The city’s Office of Innovation and Technology spent nearly $90 million, no small part of which are spent on large legacy systems. (An OIT rep declined to comment for this story.)

You can take that at least a couple different ways. One might shudder at the idea that half of an operating budget on core government services relies on nongovernment employees, seeing it as a dismal misalignment of needs and ability and a contribution to city fiscal instability. Because of generations of mismanagement and cultural mistrust, the very idea of city contracts and government procurement can conjure corruption and inefficiency. Another perspective has emerged, though informed by flat or declining federal investment in cities since the 1980s: Local governments are asked to tax less and do more, so they have no choice but to rely on contracted services with expertise to operate more efficiently and effectively.

Locally, this latter perspective is familiar to a class of entrepreneurs and technologists who say they take very seriously their work with government. Some see this contracting as something akin to service work, ranging from pro bono consulting to reduced-price efforts. They know they may not represent the norm but they do feel they can represent a trend, and they fear Doroshin sets that back.

Ask them, and few will say that the city needs a higher bar to entry or more regulation or oversight of the contractors they use. Instead, some suggest compliance with existing rules, distributing risk across more (not fewer) service providers and some expectation from the public that mistakes will be made when speed is necessary. Without any room for experimentation or risk, you’ll end up with a slower-moving, less innovative and less competitive city bureaucracy, they argue.

Chris Alfano, the CTO of Jarvus Innovations, has for the last decade worked closely with local organizations like Code for Philly in advancing civic tech initiatives, and his own company has contracted with local schools. While it’s easy to blame PFC for their incompetence, he said, that’s just one part of the systemic failure in our culture around government risk-taking.

As PFC continued to exhibit a lack of skill in reaching its goal, Alfano believes the City of Philadelphia could have acted in a different way. Rather than have Deputy Health Commissioner Dr. Caroline Johnson step down from her post for improperly consulting with PFC and the Black Doctors COVID-19 Consortium during the RFP process, government leaders could have only ended the PFC contract — and then used PFC’s infrastructure to carry out its original goal of providing the public with COVID-19 vaccinations, for instance.

the more I read about this story, the more it sounds like we're just eating our own for doing their best in a tough situation to feed a hysteria loop https://t.co/ebn6U4ZQmI

— Chris Alfano (@themightychris) January 31, 2021

Alfano said he is concerned that the City’s decisions may dissuade other small groups from partnering with local government, ultimately hampering innovation.

“It’s easy for everyone to get behind the narrative of doing things differently” — but when it fails, we assign blame for that newness, he said. The speed at which change is required in crisis also sets innovation up for failure. “I’ve seen so many people start a program in schools, but once you get to a certain size, I’ve seen so many good people get burned out. We need to make a cultural shift where we need government to do things and take pause.”

For Alfano, the PFC situation eerily resembles the CDC’s $44 million payment to corporate firm Deloitte for a failed COVID-19 vaccine data system. While PFC was a small entity that secured local government support, Deloitte was a large one that secured a federal government contract quickly — and also failed.

Against the roughly $4.8 billion city budget and the tidal wave of disruption set off by COVID, PFC is a tiny blip. Yet public trust has been eroded. Questions remain as to why the group was able to secure a city contract in the first place. But the mismanagement didn’t happen because the group was new, or because of its tax status. They happened because of who was in charge.

Cory Donovan, the head of impact investing advocacy group ImpactPHL, cautioned against damning all for the actions of one.

“There are bad actors in every industry and across all sectors of our economy (for-profit, government, nonprofits, and even religious institutions). There are plenty of well-run businesses going well beyond a profit-focused bottom line” — think Ben & Jerry’s, he said.

Similar to Berman, Donovan’s point, as well as his own organization’s mission, is built on breaking the assumption that mission and profit are exclusive. Misguided or manipulative leaders should be criticized no matter where they come from. But good work can be done anywhere, too.

“As consumers, employees, and investors, we should allocate our resources to those that contribute and support society rather than those that harm and extract from us, he said. “As hard as it is to be an entrepreneur in the first place, it’s even harder when you’re trying to also solve societal problems,” he said. “We need to enable and support that kind of effort, rather than castigate those who choose a for-profit model just because a rare bad actor.”