Category Archives: Insights from the Business World

Why are so many non-profit salaries so low?

Homeless person, with shopping cart

a nonprofit mobile office?

Dan Pallotta’s book Uncharitable continues to move me; it is changing my views of where the nonprofit sector needs to go. In the first portion of the book, Pallotta delves into the origins of strongly held American beliefs about the nonprofit pay. He writes:

“In Puritan times, people gave directly to the needy, without using brokers. This is no longer possible on any meaningful scale. Charity is no longer an exchange between the non-needy and the needy. It is an exchange between the non-needy (donors) and the non-needy (the charity workforce) to provide services to the needy. Is an exchange between equals to help the needy. It is no different than the exchange between those who buy cars and those who make them. A law that was meant to provide an economic discount to the needy in face-to-face transactions is now improperly exploited to expect nonprofit sector workers to provide wage discounts to wealthy donors who are in essence buying a service from them, which they use their labor to provide. The donating public expects the nonprofit workforce to extend to it the law of mercy. But it was never intended that such a law be applied in this way.”

This is a big aha for me—over time two distinct dynamics have become confused as one. The first dynamic is the wealthy giving charity to the needy. The second dynamic is nonprofit employees (the non-needy but non-wealthy) working at below market rates, thus also giving charity to the needy. But in doing so, the nonprofit employees are in a way also giving charity to the *wealthy* as well, in the form of their under-priced labor. And this practice of low nonprofit wages is not just common, it’s widely considered to be the only acceptable situation.

I’ll never forget attending a mixer of the San Francisco chapter of YNPN and overhearing several discussions of nonprofit employees who have no health insurance. They were talking about where to go in the city to find free health clinics! These are smart, young, energetic people who could easily find work in the for-profit arena. They are living lives of poverty in order to work for nonprofits. It just doesn’t seem right to me, it doesn’t seem sustainable, and I absolutely can’t see this being good for the field. It doesn’t take much imagination to see many of these young people going and finding “real jobs” and only doing social benefit work on weekends. What a loss for the field.

So what’s going on here? My guess is that there are two factors in play.

One factor is that there are a few markets for the kinds of social benefit that nonprofits generate. These are organizations that are creating real value to society, but which society isn’t currently willing to pay for, at least not proactively. It’s a lot easier to get money to build prisons than it is to build programs that prevent the need for more prisons. I hope that over time as the underlying math and science of how societies work is better understood, the value of the right types of social investments will become obvious and uncontroversial.

The second factor is that there are huge discrepancies in the nonprofit world when it comes to pay—people at some organizations get paid extremely well, even if the impact isn’t clear. My guess is that this links to the relative lack of market mechanisms in the nonprofit world, where pay and impact can be worlds apart.

I wonder: if we can better understand and measure impact, and if we can create markets for that impact, can we find ways to fairly compensate talented individuals for the positive social impacts that they drive?

Struggling business or highly effective development effort? A social enterprise dilemma.

Developing 0.750–0.799 0.700–0.749 0.650–0.699...

Social venture and global competition

Suppose I told you about an investment opportunity with an outsourcing business based in a developing country. They’re the first of their kind in that country, which is an unknown in this particular industry. Furthermore none of their local employees speak English natively, and so all must study English and do their best in working with English-speaking clients on projects that are usually in English. Oh and by the way, this business’s main competitors are based in English-speaking developing countries with a history in the industry, and much more developed base of management talent. Would you like to invest?

Now let’s say I told you about an opportunity to support an innovative nonprofit
that provides top-notch training to underprivileged people in developing countries, and provides them three times their prior salary—plus benefits—to work in teams working on real projects, for real clients? And furthermore, after three to four years of work experience, employees are able to find even higher paying jobs, paying three times again what they made during training. Oh and by the way, this organization takes every dollar you donate and stretches it to be three dollars of impact, because of the income generated by the real world projects that are the heart of this training program. Would you like to invest?

Social enterprise, at the outset, is a great story to tell: running a real business that provides training and employment opportunities for disadvantaged people. But such businesses face the real-world challenge of competition from regular, for-profit businesses. When it comes to a local business, such as a restaurant, where the “delivery of value” is necessarily local and in-person, such social enterprises have a relatively even playing field on which to compete.

However when it comes to a global business, the playing field can be much more uneven. Whereas a competitor to a local restaurant faces similar costs for rent, personnel, and materials, a competitor to a global outsourcing firm might enjoy better English skills, a more highly educated talent pool, along with the ability to recruit highly skilled senior management locally, instead of from abroad.  Thus it can be very challenging to compete, sustainably, against such advantages.

So does this mean businesses shouldn’t set up shop in said developing country, because of those disadvantages? It depends on the goals and expectations of the business.

If the goal is to make bottom-line profit, then it doesn’t make sense to  “fight the current” on such a critical point such as the talent pool. You’re going to have to spend extra money to make up for the education system and bring people up to speed. Plus, to ensure that your organization can compete in the global space, you’re going to have to pay good money to hire for key strategic positions, whether you are hiring from the limited pool of locals, or you’re bringing in expats.

But if the goal is development, then the very sources of these disadvantages gives the justification for investment in such a social business. Because through such investment, the “disadvantaged” developing country can start on the road towards building a globally competitive talent pool. How else are they going to do it? Furthermore it’s a fair bet that in a country which has had much less investment in the talent pool, there are a lot undiscovered—and highly motivated—people looking for an opportunity. And this spark of enthusiastic hidden talent can be a real advantage for a business.

So yes, such extra costs to running a social venture in a “competitively disadvantaged” country make for a challenging business opportunity. However as a development opportunity, the ability to create a lively new industry that trains locals in relevant global skills can make for a highly impactful, highly relevant social investment.

The key question to me is, will traditional funders of development efforts have the insight and the courage to support a business-looking engine of economic development for the disadvantaged?

And at the end of the day, does the “developed” world actually welcome the competition?

How Understanding Market Power Can Multiply Social Impact

How can we prepare workers in social enterprises to continue to get good wages going forward, when they enter the open job market? To me, skills-based market power is the way to go.

So just what is this market power? It could come from a coordinated group action to limit competition and maintain higher wages. Or it could come from skill, where the workers have an uncommon ability to deliver value to the market.

Let’s consider this case of worker-based market power more carefully. If the worker’s skill is uncommon and valuable, then there’s truly a negotiation to be had with the employer. The employer needs the worker to deliver the product or service, and it isn’t easy to find enough qualified workers, thus workers are able to demand higher salaries, and the employers know that finding replacements will be tough, and so they value the working relationship more highly.

Now look at the case of employer market power. If the worker’s skill is easy to find then the employer will have a lot of people to draw on, and this will drive down the wage. To make matters worse, if the skill is not particularly valuable, the employer will tend to invest even less in the working relationship, and be more likely to engage in short-term employment arrangements. In other words, workers get the short end of the stick.

Consider the case of Friends International, that among other things trains disadvantaged youths to be cooks in restaurants. Being a savvy organization, they are acutely aware of the challenges that their employees face when they look to find their next job after working for Friends. And thus they strongly encourage their cooks to stay with Friends long enough to master both Cambodian cuisine, as well as Western cuisine, because they know that cooks who are competent at both are in much higher demand in the market. Rather than simply flooding the market with more “run of the mill” cooks who will lack market power, they create much greater social impact by training employees to that higher, harder to achieve level of skill.

Thus I propose that smart social enterprises must be aware of the dynamics of market power. They should consider how to orient their training and job opportunities towards professions where hard-working people who invest the time and effort can develop market power, and enjoy the benefits.

Talented leadership drives great social enterprises, but how to afford it in the developing world?

GDP (PPP) Per Capita based on 2008 estimates h...

GDP bites back

It is fantastic to see “first world” entrepreneurs bringing social enterprise to new fields in the “developing world,” especially fields that are complex, global and competitive. Assuming that such a social enterprise can find it’s place in the market, the employees are sure to receive world-class skills and training that will give them fantastic career options. But there’s an inherent challenge to leading such an enterprise from an expensive “first world” country.

But consider this scenario: You’re running a US-based social enterprise that competes for customers globally with for-profit companies. Your main competitors are in India. Although your ground-level folks, who actually do the hands-on work, are in a developing country with similar costs to India, your leadership staff is in the US.

To run this business, you’ll need a great management staff. You’ll need leaders who understand your industry globally, who can guide your investment strategy, and who can land big sales contracts.

In the old days, to do that at a world-class level, you often needed “first world” expats—and the large salaries that went with them. But these days the world is changing. In some fields you can get management talent for $40K in India that would cost you $120K+ in the US. It’s a big advantage for these Indian firms.

Granted, it’s an advantage that’s been many years in the making. India’s education system has done a good job of preparing people in English skills, as well as technology and leadership skills, to compete on the global stage. And that talent pools makes a lot of things possible for Indian companies.

Consider now the global competitive landscape: You’re competing neck and neck with an Indian competitor to land a big contract. The customer knows that there are several viable options, and pushes you hard on price. You lower your price, as does your Indian competitor, until you get to a point where you just can’t go any lower. But they go lower, and they win the contract.

How do they do it? They are able to deliver a comparable service to you, but because their senior management salaries are 1/3rd of yours, their overall costs are quite a bit lower.

So what can you do? One route is to find that much more efficiency from your business because your management staff is that much better. In this case they’d need to find 3x the efficiency—challenging, although not out of the question if you can leverage technology in a way that your competitors can’t. Another route is to go into more complicated, higher-end services that the competitors are unable to provide, thus leaving them unable to compete with you, at least for now.

Whatever the strategy, though, the key point is that through head-to-head competition, if you don’t have a competitive advantage to outweigh the disadvantage of higher management salaries, you’re going to lose.

Those folks in India who have access to this talent, they have a lower cost structure without greatly impacting the quality of work they’re getting. So they will set the pricing for the field. Yes, getting sales is more than just price, but when you have two companies with comparable service, comparable output, then price is a real factor. Those lower cost-basis folks will be able to bid down much lower than you, and still be making a comfortable margin. Furthermore they may have a significantly lower tax rate.

Now if you’re going to compete with them, and have a US based cost structure for management, that’s going to be really challenging. Those more expensive US people need to add that much more value than their less expensive Indian counterparts.

And so this becomes a challenge for a social enterprise that wants to attract great leadership talent to work in the “developing world”. Ideally they’d be able to find local candidates, but those people are in such short supply that they can make a lot more money in the for-profit sector.

On the flip side, a social enterprise can attract expats who will work for local salaries, but they tend to stay for two to three years at most. My instinct says that while getting top-notch expat talent is of great benefit to an organization, the turn-over that is created by low salaries is disruptive to the organization’s success.

So what to do? I think it would be really interesting to see a pool of money from organizations like USAID go to funding high-level management talent—expat or local—for top social enterprises. The goal would be to support the world-class scaling up of such enterprises, while creating a pipeline of local leadership talent to fill those positions.

The challenge is that establishing such a pipeline won’t happen overnight—it’ll best be served by improvements throughout the education process to identify and nurture talented locals and encourage them to pursue social enterprise careers. Thus it would take a coordinated effort, and a patient effort, to build such capabilities locally.

There’s hidden talent in those rice fields

Given the chance, what might he be capable of?

I recently wrote about DDD Battambang which is bringing IT jobs to rural Cambodia, a place traditionally known for farming. In response to this business, one could reasonably raise a concern about the talent pool. Will the people really be there to make such a business work, and furthermore will they have had sufficient experience and education to get up to speed?

These are certainly valid questions, and they bring to mind an important but relatively unknown book about talent written by a gentleman named Elliott Jacques. In his book Human Capability, Jacques makes a point which is of great interest to social enterprise. He states that one’s talent trajectory, for instance how far ability-wise one can get as a manager, is as intrinsic as one’s eventual height. That as long as a person isn’t malnourished or abused, their leadership talent will develop as they age, whether or not they have had education or leadership opportunities.

Thus in disadvantaged areas, we can expect that there are a number of undiscovered, under-leveraged people who could be doing great work on the global business stage, if they just had the opportunity. That even though they may not have had great education or work opportunities, their innate talent lies ready and waiting for action. This is great news for social enterprise, which faces a variety of challenges in competing with a normal for-profit company. The ready availability of such a talent pool can really make a social enterprise competitive in the market place.

When I was in Cambodia, I had the pleasure of meeting several people like this, who are talented, who hadn’t had good work opportunities before DDD, and who are very happy to have the opportunity to do global work in a rural setting near their families.

I believe there is great potential for a variety of other service delivery businesses to base in rural locations. It will take dedication, problem solving, and knowledge sharing to help move these efforts forward.

btw If you’re interested in learning more about the book “Human Capability,” check out my Amazon review that describes his unique way of identifying leadership talent.

Enterprise as Animal: Survival of the best learners

Warning!!!...Tiger in training...:O))

Investing in the future

A few days ago I wrote about the idea that as technology becomes more available to the developing world, the price points for BPO services will erode–customers will demand and get lower prices. Good for customers, bad for providers. So what is an existing BPO provider to do?

To answer that question, I propose that we look at an enterprise in a different way. A conventional view of an enterprise looks at the output, what it produces; in other words “enterprise as machine.” But a more interesting way to look at an enterprise considers how it grows over time, in other words “enterprise as animal.” Yes, that animal still “does things” however it’s also continuously growing, changing, and replenishing its existing cells.

In the case of a BPO social enterprise, what would this animal metaphor look like? Consider that a social enterprise in particular has an ongoing flow of people joining anew and “graduating,” leaving for other companies. That graduation is a victory for the social enterprise, and yet it also comes at the cost of talent walking out the door. That talent then needs to be replenished.

Thus we can consider–how efficiently can the organization replenish the talent that graduates and moves on? Does the rate at which newcomers learns go up, go down, or stay about the same? Here’s the thing: it actually needs to continually go up, and here’s why.

Recall the idea that the price points will erode even more quickly going forward in the BPO space. This means that BPO enterprises need to become able to do more and more complex work, in order to stay ahead of the “low price” BPO market. But now with a social enterprise, where you have talent graduating, you have to be that much better at climbing the curve, and training the new people who come in.

So what does this mean? It means that for a BPO social enterprise to thrive, it needs to become really good at learning and improving. The status quo is no good in a world that continues to move. I was chatting with Alpa Agarwal of Microsoft recently about this, and she reminded me that this is the way of business–the world keeps moving.

Thus the enterprise needs to prioritize learning, and get really good at climbing the complexity ladder fast enough to stay ahead of the low-end commodity curve.

Granted, this idea assumes that the low-end will keep climbing; most likely there are barriers at specific points in the complexity curve that will slow down or entirely prevent many new players from entering. Nonetheless, the successful BPO must either figure out how to pass enough of these barriers to have good price points, or they will be in a tooth and nail price based fight for survival. Learning never looked so good.

More tech in more countries means more competition

At the SOCAP 10 conference in October I heard Leila Janah presenting her thoughts on where BPO (business process outsourcing) is headed when it comes to social enterprise. Although I’m not quite as confident as she is on the ease with which complex BPO projects can be reliably broken into small pieces, farmed out to different vendors in different parts of the world, and then sewn them back together with high quality, I do see the writing on the wall when it comes to BPO.

As the cost of Internet connectivity and computers continues to go down, there will be a larger and larger potential pool of people in the developing world to do BPO work. Furthermore it’s not unreasonable at all to assume that there are many “untapped” people in these countries who are extremely talented and who can do great work in the BPO space as operators or more. Thus it seems very reasonable to assume that the price points that customers will pay for the low end work is going to be driven down.

The one fly in the ointment would be on the service and reliability end. It’s one thing to be able to *technically* do the work, but what about being able to understand what the client wants? And how about being able to flex on the fly as requirements and needs change?

Yet I bet that even at the low-end, this interface will be figured out. It could be that a middle layer player develops (if it’s not there already) that handles all of the client facing communication and negotiation, and is able to efficiently farm out the hands-on work. As a former program manager, I really believe that the proof is in the pudding–I’ve seen too many “that ought to work” ideas not actually work. So we’ll see how well this one works.

OK so the vendor supply for low-end BPO will grow, and that will mean lower prices paid for the work. But what does that mean for an existing BPO player–what should they do?

Any ideas? Post your comments below.