Tag Archives: Business

For-profit, social benefit: oxymoron or smart choice?

Ten-dollar bill obverse/reverse

Profit and social benefit can go together.

Several years ago, a friend of mine came up with a very innovative way to motivate low-income kids to work hard on improving their vocabulary. Sounds like a great non-profit, right?

But here’s the surprise: he very intentionally formed his company as a for-profit. There are no deep pocketed donors, no fundraising drives. Rather the company is supported by government funding that goes to provide low-income kids with supplemental tutoring. Furthermore in many areas, his company gets paid for actual improvement of reading scores—results—rather than just delivery of service.

Taking a step back, if the societal goal is “raising highly literate kids”, beautiful things happen when a market is set up to pay for outcomes. That’s when entrepreneurs bring their creativity, talent, and energy to effectively meeting that need. And structuring as a for-profit gives him many advantages in serving this market.

Let’s consider the potential advantages of being a for-profit here, rather than a not-for-profit:

  • A for-profit can pay its staff competitive market rates, rather than the lower “nonprofit salaries” that are considered “appropriate.”
  • A for-profit can afford to hire a highly talented CEO with experience scaling services nationally, rather than someone less experienced.
  • A for-profit can avoid the criticism and scrutiny of the non-profit “overhead police” who don’t understand the connection between expenses and impact.
  • A for-profit is accountable to the market—in this case the kids and their reading scores—rather than simply needing to please donors to keep getting funding.
  • A for-profit doesn’t have to spend time on fundraising, and has much more control over future income.

I have to admit that when I first heard about my friend’s company, I just couldn’t understand why he turned away from the benefits of being a non-profit. But the more I learn about the field, and read books like Dan Pallotta’s Uncharitable, the more I see that there are real trade-offs to be had in structuring a social benefit organization.

One last thing: it’s worth noting that my friend is extremely committed to the cause of education. He’s not in it for the money. For many years he has put all of his earnings back into the growing company, so that he can reach more kids. For years, in spite of running a company that employs hundreds, he hasn’t owned a car. Clearly his motive is impact, not personal profit—which makes his choice of a for-profit structure all the more fascinating. Cases like this lead me to wonder if the assumptions behind “non-profit” are in fact a hindrance.

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?

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.