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.

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