29 December 2009 ~ 7 Comments

Dear Social Entrepreneurship Thought Leaders

This is a comment I posted on the Social Edge blog about hybrid organizations.  I thought I would re-post it here.  If you have the time, read the whole discussion on Social Edge as it is very interesting!  I think there is a big divide in the theory and the reality of social ventures, just as there is with development work.  I am interested to speak with more people who have experienced the reality but also have studied more of the theory than I have to be able to notice more of the similarities and discrepancies.

Would love to hear your thoughts!

—-

Dear Social Entrepreneurship Thought Leaders –

You are likely the types to always pick holes in things and seek to improve all aspects of your work, so I hope you all won’t be offended by this opinion: we are still very far off the mark with how we quantify a “social enterprise”.

The best awards and programs available to people in our sector are asking for these things:

– Proof of financial sustainability
– Ability to scale to “one million people” or other “large” numbers

It’s hard to measure “impact” across a broad range of social programs, I get that. But we still need to consider what the metrics we are putting out there to track “success” are saying. We are rewarding people who “reach more people” and “bring in more money”, but not necessarily those who “improve their offerings the most”. We need to find ways to start rewarding those who choose IMPACT over income and who choose SUCCESS over scale when they are faced with those dichotomies.

With business, we all “get it”. Businesses make choices which ensure future income. With “social” ventures, you will be faced every single day with a conflict of interest: should we choose more impact or more income? There will ALWAYS be conflict. I agree that market forces shape our world and that what is demanded will be created, but we don’t want to be a sector just filling demands! We want to be a sector creating NEW and unimagined possibilities. So, in order to do that, we need people who are focused on the QUALITY of what they are doing, looking to improve the quality of their impact to the point where they create new demands and new realities for people who never thought their needs could be filled so well, so they never knew to demand it.

Lindsay wrote “Grameen and many of the other Tier 1 MFIs have run successful foundation arms because their for-profit has been so successful.” I think this statement embodies a flaw in our collective mindset around social ventures. In my opinion “Grameen and many of the other Tier 1 MFIs have run successful MFIs because their foundation work has been so successful at doing the good work that is needed to MAKE MFIs successful!” It does not matter if it is a separate foundation (hybrid model) or built into the same non or for-profit entity. What matters is that the people running the project care more about the QUALITY of their impact than the bottom line of their bank account.

At Grameen, they realized that they can make a profit making loans. But making LOANS was not what they were trying to do. Making the right loans, to people who understand the financial implications of those loans, who have support and connections to improve their ventures, so that their lives can be improved: THAT is why they exist. You can argue “if they help people’s businesses become better they will get better repayment rates”, but from having heard Yunus speak, we all know that his motives were not to make more profits. They are to reach more people with more QUALITY impact and IMPROVE more lives (not ‘give more loans’).

We are gearing up for a micro-finance fall-out in Cambodia similar to the mortgage crisis in the US. In the MFI world in Cambodia, where new banks are popping up on every corner, some business entrepreneurs are realizing that they can have access to low-interest or interest-free loans due to the popularity of micro-finance right now. They can make a lot of bad loans and still make a profit. And they can skip the education of the lenders and the borrowers, which has been key to Grameen’s success, because those are not the metrics the social entrepreneurship community is holding them to. We are allowing them to “reach more people” and “make more income” while doing really poor work. That is not the social venture movement I want to be a part of.

Let’s change this! We need to realize that, in a lot of areas, the biggest impacts WILL come at a loss of profits. We need to change our reward system!

Here are two examples of companies which have been put on pedestals as model “social ventures” – and both cases, they fit the criteria of making profits but that has come at the detriment of improving their impact:

a) There are many in the “we want to do good, but are willing to do less good to make more money” category. To a point, we all have to agree that we are doing that, but where we draw the line determines the quality of our offerings. Some of the most compelling proof I have seen that sometimes NGO oversight is necessary in this sector is with ceramic water filters here in Cambodia. This is a look at two ceramic filter companies:

The first group that started making them in Cambodia was run by an NGO. The business itself was designed to be “sustainable” – meaning it completely covered its own costs. All aspects of impact were considered: plastic is made in Cambodia, the first of its kind here, the testing has been very thorough, each filter is tested, flip charts are made to educate potential buyers about using and cleaning the product, people who sell them are trained, etc. One of the keys to making the filter 99.99% successful is painting the filter with a light coat of silver diluted in a liquid which kills viruses. This addition clearly costs more money, but the system is managed by an NGO that cares more about the “social” part than the “venture” funding. They want it to break even, but they are happy to invest all of the profits into making the filters better.

These filters were then copied by a larger organization. At first the NGO thought “Great! More filters to help more people!” But, I have been to both factories. The other organization had very little oversight, poor to no testing, and completely cut out the silver coating stage. Why? It’s cheaper. All of the rest of that stuff costs money and time, and they are interested in turning a profit.

In the first case, it would be a “hybrid” organization, a business which covers its own costs but with an NGO partner who manages the oversight. Sales people make money the more they sell, but there is no one at the top of the system who has control over the product design who stands to make a lot of money if the company does very well. They measure success by the quality of their filters as well as the reach of their impact, so they don’t have an incentive to cut corners on price. Actually, the man who ran the NGO that started it, was not doing this to make money, as if he were, he too would have skipped the silver coating and the costly R&D. The filters that make a lot more money are less effective and are diluting the efficacy of the whole ceramic filter movement as people will stop trusting the whole concept if they use one of their poorly tested filters.

By turning more profit and “reaching more people” they are decreasing the quality of their product and in some cases actually causing harm to the people they claim to be trying to help.

b) There are many companies out there who claim to be “social” ventures, but really their decisions are ALL about profit. They have even entered the sector in the first place simply because they see how popular it is and they think that by aligning themselves with a social movement they have more chance to make a profit (as in the MFI examples above).

A friend of mine here started a project making a product from local recycled materials made by a traditional craftsmen. His goal was to support these men and others like them and to make a cool recycled product. When a US-based company recently bought the concept and decided to take it to market, he said that in the final meeting the person running the new company said “I don’t care at all that this product is recycled or providing jobs and doing any good, I just know it’s going to be really popular and make us a lot of money.” His “social venture” is now having the products made here in factories, skipping over the traditional craftsmen, because it’s cheaper. It’s “social venture” by name, but not by actions.

The world of “social venture gurus” out there (yes, all of you reading this) who set the “rules” need to stop focusing on rewarding people who “break even” after X number of months, but those who can prove that they are making decisions which improve the IMPACT of their work even if it means profits decrease. Tyler, that is a question you all could be asking your potential UI people: “Give us an example of when you choose profit over impact (we all have to have times when we have done this). Give us an example of a time you choose impact over profit.“ THIS is how we need to judge the quality of a venture, not by how many people they “reach” with their cheaply designed water filters.

Running a hybrid organization myself, I can easily see all of the ways that having an NGO and FPO partnership can create a lot of gray areas where one is using the other too much as a crutch. A good thing though about having an NGO partner is that, at least NGOs have to report their spending in the US. At least there is SOME government oversight. No one is checking to see if all of these Social Ventures we all speak so highly about are really doing the good they claim to be setting out to do. I don’t think having an NGO partner is the right answer either – having lived in Cambodia for five years, I have surely seen my fair share of NGOs which are “non-profit” by name only. It’s not about the legal status, the hybrid-ness or not. It’s about the integrity of the people who run these ventures, and the standards WE set as a movement for how we rate these. From what I have seen, doing good often comes second to getting rich, and THAT is causing people to have less-clean water and products which are “social ventures” by name only.

For a social venture to be really great and to put the social side over the profit side when it comes to improving their offering, the program needs to be run by someone who cares more about doing good than making a profit. Before I spent nearly 5 years living in Cambodia I probably would have erred on the side of the “people are inherently good” argument, but from what I have seen in both NGOs and social ventures I would now disagree and say a LOT of people get into this work because “it is popular and it can make money.” If we hold the social venture bar at financial sustainability, I assure you, in many cases, you will be letting a lot of the WRONG groups into the social venture club and keeping a lot of the right groups out.

Let’s start asking different questions!

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  • http://twitter.com/mifos Mifos Initiative

    Thanks for the thoughtful and provoking post. Here at the Mifos Initiative within Grameen Foundation, over the long term we are aiming for financial sustainability but our first and foremost goal is our social mission to help microfinance institutions reach 100 million new clients over the next 10 years through the strategic use of technology.

    Hybrid organizations while a complex structure are key to successfully driving a social venture. This past June we participated in a Hybrid Organization Summit lead by the Mozilla Foundation. Check out what was discussed and who attended here: https://wiki.mozilla.org/Hybrid:Summit:Agenda

    Edward Cable
    Mifos Initiative
    @mifos

  • danielapapi

    Hello Edward and the Mifos Initiative Team –

    In regards to your comment, please let me know if I am making too many assumptions here, but I suppose that when you wrote that your social mission is to “help microfinance institutions reach 100 million new clients over the next 10 years through the strategic use of technology” it might also be implied that you not only want to help bring loans to 100 million new clients, but you want to help them reach 100 million new clients with “high impact” loans, yes? Is it fair to say that you want to further the Grameen initiative which isn't just about “giving out more loans” but giving out the right loans to the right people which help improve people's lives? Loans which result in foreclosures or repossessions or micro loans to buy TV's for family homes here in Cambodia (which tend not to pay themselves back, though there is always someone willing to lend that person more money to pay back the original micro loan) are not the types of loans I think you are hoping will be include in the 100 million new clients.

    Of course we have to accept that their will be failures and less successful areas of our work, but we don't set out to achieve those. Might it be fair to say that, for all of the quantitative numbers put out as goals by organizations, the ones aligning their actions with achieving “quality” results as they scale are the ones we should look to partner with? To see if an organization is really focusing on impact, we don't want to know that they are building 1000 schools, helping 100 million people access micro-finance loans, delivering training to every primary school teacher, etc. Schools don't teach kids. Loans don't help people. Poor training can be useless. We need to get to the CORE reasons we do the work that we do. From an outsiders perspective and from speaking to some Grameen staff, it looks to me like Grameen is not focused on giving loans, but improving lives. The CORE reason that Grameen and some other MFIs are successful (and by successful, I don't mean making the most money nor reaching the most people, but successfully IMPROVING LIVES) appears to me to be because you all recognize that loans DON'T change lives. People do. Loans can put a person more in dept and make their situation worse, so Grameen and others train their MFI employees to thoroughly vet clients, to explain the implications of loans, and to support and connect borrowers to resources which will make THEM successful. Not their loans, not the bottom line of the MFIs (though of course it does impact that), but their LIVES. You are working hard each day to offer people access to a tool which they can use to change their own lives, yes?

    I wish this was the case with all social ventures, NGOs, and foundations, but a lot of times, once people set quantitative goals, they forget the CORE reasons for their work and instead work towards the numbers they have declared that they are setting out to achieve. We partnered with an organization who at one point told us to “deliver the items and take a photo, we don't care if the training is done or if the project is ready, but we need proof for the donor that it exists by the end of the month”. They are aiming to be in more and more towns and provinces ut I can assure you, they are not aligning their actions with improving many lives, just reaching useless self-made metrics. And, as we all know, they are not alone.

    I intended my post to be a call to remind us all to FOCUS ON IMPACT! Your work and the work of Grameen overall is not and will not be successful because you focus on reaching more people or giving out more loans. You all will continue to be successful because you all focus your actions on improving lives, and by doing so, you will continue to make sure that the loans you give out to more and more people are primed to do just that.

    Thanks for the work that you do! I appreciate that you responded to this blog post. Thank you as well for the link to the Hybrid Organization Summit. It sounds like there are a lot of others who share similar ideas!

  • danielapapi

    The conversation around this topic is still alive and well on Social Edge: http://www.socialedge.org/discussions/business-

    I have attached my most recent comments below – but some of this will be out of context if you don't read all of the posts. Happy Reading!

    —-

    I AGREE! 90 women or 900 women would (or will!) be MUCH better. We need to invest in Rachel and in Keokjay, because she, and people like her, are not the first ones to jump up and down and wave their hand when people throw investment carrots in front of them. They are skeptical of scale for the sake of scale, because they value quality over quantity. They don't want to turn into the filter company which is scaling, and producing cleanER water, but not the MOST clean water possible. Some times, like in that case, losing a little quality for the sake of quantity is NOT worth the trade off.

    I agree, we do need to find ways to invest in organizations who can reach more people, in more places, faster. But, just like when I worked for a consulting firm with a management team who would over commit to impossible feats just to get a client, there are social enterprises trying to scale “because the money is there”, “because people want to invest in them”, because they “sold out of everything on their site so they better find ways to get more up there.” Too often, when the demand for our work is increased, we all try to increase what we can supply when perhaps we should be sitting tight and growing at the scale where we can keep quality in check.

    This happens in development work ALL the time. I met with a hotel here in Cambodia which allows their guests to “help poor people” by picking from a list of things they can donate (food, school supplies, a well, a house, etc). When I asked how they decide what projects to support, they said the do so by what the clients want to buy. They want to buy this person a house, or they want to fund 200 wells with their name on it. A hotel or an NGO or a person who will allow their development projects' scale and scope to be dictated by the funders' demands is looking to scale for the sake of scale, often at the expense of quality. This is the same as a social venture taking funding because it's on the table – a micro-finance organization frantically seeking out more places to give loans because more people want to fund them – a voluntourism program looking for more places to put English teachers and begging NGOs to take them because that is what people are looking to pay for. It's backwards!

    YES, let's invest in scale and scope and more people and more numbers… but ONLY if they can be tied with more impact! Dilution due to scale in the social venture world can cause harm AND can take support away from the great leaders who are growing more slowly because they believe that quality is the most important part of their work. They are committed to changing lives. They are not willing to dilute the “social” side of what they do.

    The “other water filter company”, the one not using the silver, is not really “social-washing”, shall we call it. They ARE producing filters which produce water which is MUCH cleaner than what comes out of the pumps and taps. They just aren't producing the CLEANEST water, because in order to do so, they would have had smaller margins and perhaps had to scale slower than the big funding organizations would have liked. Maybe the first group wouldn't reach “1 million people in three years” – maybe it would take 10. We shouldn’t turn a blind eye to them because they are more realistic or afraid of diluting their quality. We should though, as you imply, help them to consider other ways to scale which will keep the quality they are looking for. Our carrots can’t be “we will give you money if you prove you can reach more people.” They should be “we will give you money if you prove you are committed to quality and we will help you find ways to reach more people while keeping that quality intact.”

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