Efficiency at the Base of the Pyramid

Efficiency doesn’t come naturally to the Base of the Pyramid. Everyone needs to understand it. Someone needs to champion it. Our low income customers eventually benefit.

Let’s start by decoupling funding and operations. Operations are often treated like a black box – money goes in, and money (also let’s not forget social impact) comes out. Funding is often the focus – “Given my operating model, and my social mission and social impact, can you provide me with funding?” said the CFO to an impact investor – or even a grant funder. Some impact investors will turn around and say, “I think you need to tweak your operating model to become more efficient”. Time for the CFO to move on to the next investor or funder – according to one CFO in the sector, there’s a list of 300 investors they can approach, and basic funnel dynamics tell you that at least a handful can be converted, no matter what the underlying model looks like. Blame it on the ego of that particular impact investor – some of these conversations do tend to degenerate into pissing contests, and it takes incredible soft skills to manage some of the people in this otherwise well-meaning space. But it’s very easy for things get murky – and inefficient.

At a recent dinner conversation I heard the inside story of a ‘Social enterprise’ with USD 7 m in costs, and USD 500 k in revenues. It is a large and well respected organization, doing some terrific work and it has been around for 20 years. For each of these 20 years, costs have exceeded revenues by at least 4 times, and this gap has been plugged by grant funding. It sells an engineering product to deep rural customers. Deep rural distribution can be very costly, especially when it’s for a new innovative product, one which requires a large capital outlay on the part of the end user – not just soap, shampoo and SIM cards which are readily sold in standard mini bite sized chunks.

But the organization is engineering and technology centric, with a good, charismatic and well-connected fund raising team. They are able to excite grant funders year after year and keep the operating model going. The painful exercise of reviewing the operating model and bridging this enormous gap between costs and revenues requires an operations and business strategy centric ex-consultant (not that I am offering my services here) to come in, and make a few game changing changes. There has to be a lot of latent value which can be captured to bridge this gap – geographic footprint optimization, partnerships with other players e.g. MFIs (not that I am offering Juhudi’s support here), performance management systems, etc.

On this note – as an MFI we get many requests for partnerships. In fact we get so many, we are often a little under water. On a given day at least 2 people will walk into our offices and pitch their product or idea to us. On some days we get to do nothing but meet these social entrepreneurs and potential partners. They want both, access to our deep rural loan groups, and want us to administer the loans, which makes sense because as an MFI we have the systems and processes to do this very well. Many of these conversations have resulted in new products, some of which have been tremendously successful – a win-win for all.

But I often wonder why players try to over specialize in rural distribution at the base of the pyramid. It is just so inefficient – and emanates from an urban ‘complexity economics’ mindset, where greater complexity and specialization has been the key source of our collective expanding wealth.

In my view, sales and distribution across multiple players, products and functions has to be consolidated at the base of the pyramid, if we are to deliver efficiency to our low income customers. We have to learn to be good in two or three areas, if we want to realize our true potential. I like to use my cricket analogy. Traditionally, or even as recently as back in the 80s and 90s, a typical cricket player was either a good batsman or bowler or just a specialist a wicket-keeper. Fielding was never really considered a key skill until Jonty Rhodes from South Africa showed everyone in the late 90s just how much of a difference good fielding can make (and he could do nothing else but field). Over time the Aussies realized that if they could push every player to be good in at least two of these four disciplines, they could hold a very serious edge over any other team. They found many players, who were meeting these standards, and this set the new bar – they dominated cricket for the best part of a decade. Now every player in every good team, be it India, Sri Lanka, South Africa, England or even Pakistan has to meet this bar. Australia has finally been unseated – cricket has never been this exciting or competitive.

Similarly, we need to have organizations at the base of the pyramid which, for example, can both administer loans, and build rural value chains – often getting directly operationally involved in both areas. As social enterprises, we often don’t have a natural incentive to consider efficiency. But if we look at the for profit sector, there are plenty of examples of efficiency emerging naturally from the system. For example, it’s what the traditional seed and fertilizer input providers have realized holds enormous value. They have to go out and visit all these farmers anyway – why not finance their seed in addition to selling it to them as well?

Simple MFI is another beast. It’s an incredible innovation, and I am currently trying to catalyze its business development, so that the sector can benefit from it. It’s an Android smartphone application designed to transform Microfinance operations. Deployment of Simple MFI, along with a broader streamlining of systems and operations can shave 3 to 4 percentage points off the interest rate charged by MFIs to their clients – and at the same time reduce clutter, reporting errors, fraud, and other operational risks. Yet, it is a very hard sell. For some MFIs, it brings out too many legacy systems and operational issues – skeletons they would rather keep in their closets. For others, efficiency is just not a concern – especially when they are satisfied on the funding side, and the model is “sustainable”.  In fact “sustainability” is one of the most dangerous terms in social enterprise – I shall cover it in another blog post on another day.

In the meantime, I feel like a door to door salesman with my pitch pack and little IDEOS phone. I am sure it will take off eventually – buts lots of hard work is in store until then. And it was always going to be a challenge. Championing efficiency requires both leadership within an organization and also collaboration across organizations. I was recently reading a great, super insightful book by Antony Bugg-Levine and Jed Emerson, titled “Impact Investing”. According to the authors the social enterprise space is maturing, where the old charismatic cheerleaders are being replaced by people with hard and soft business skills, who will eventually bring things like efficiency to the sector. It adds a bit of clarity to the first part of my previous post on Social Enterprise and Impact Investment (http://mambojambosalama.blogspot.com/2011/09/on-social-enterprise-impact-investment.html). This is the start of the age of the less visible champions – but champions nevertheless. Keep championing.