Response to: “Is it right to have the poor pay?”

Imagine you are walking along a wide sidewalk downtown Your City, USA.  In front of you and to the left you spot a table.  People are handing out vitamin supplement samples… for free. Do you take one?

A block later, you encounter another table set up.  It’s a different group, but also handing out vitamin supplements for a small fee – say $0.25 for a mini bottle.  Do you buy one?

Now, guess which table was more successful at encouraging people to try vitamin supplements?

A recent Fast Company article citing a similar experiment conducted by J-PAL has created a bit of a stir in the social enterprise blogosphere this last week.  First, BOPreneur Paul Hudnut wrote a very thoughtful and somewhat provocative post titled, “Is It Right to Have the Poor Pay?”  Shortly after, Francisco Noguera at NextBillion posted this equally interesting response to Hudnut’s comments.

The Fast Company article concluded that J-PAL’s experiment, which demonstrated that free mosquito nets were more widely adopted than paid-for nets, had proven false the widely-held belief that it’s right to have the poor pay small fees for development-related goods and services because doing so encourages a sense of ownership.

Really?

Hudnut’s post makes the great point that, while it may not always be appropriate to have the poor pay, “charity doesn’t scale.”   Noguera agrees that “free” sometimes is the best approach, even though market-based approached are generally preferable.  He also remarks on how cross-subsidies can make the latter possible within a social enterprise model.  Both make wonderful points.

But what about the simple fact that “free” is virtually ALWAYS going to be preferable to consumers!  Especially when the alternative is a small fee.

I haven’t read the J-PAL study cited in the Fast Company article, but if it’s as straightforward as it sounds, the outcome should be no surprise to anyone.

The real question is not, “To free or not to free?”  The real question is, Do you measure success by how many mosquito nets you hand out?

If so, maybe free is best. But I’d prefer to measure success based on what % of people are using their mosquito nets six months later.  Or perhaps the % of mosquito nets that are still effective (i.e. in good shape) after 12 months.  Or the change in the number of new malaria cases in the community after 3 years.  If these are the outcomes you’re trying to impact, maybe selling them a mosquito net at a small fee still is the best solution.

Which brings me to my real point here.  Businesses frequently have to create markets and stimulate demand through consumer education and advertising (though internet startups are increasingly doing this through free).  With effort, they get people to value their product enough to pay for it.  Should international development be any different?

In Defense of Profit OR Separating the “Social” from the “Entrepreneurship”

I have been pondering this blog post over the last several days, only to find that I’ve been beaten to the punch by Nathaniel Whittemore at Change.org and Theresa at the subjectverbobject blog.  (And, much to my pleasure, Nathaniel’s post was prompted by a fantastic Fast Company article titled, “Rwanda Rising” – check it out.)

Here is Nathaniel’s quote that is sparking interest and debate:

1. The difference between “social entrepreneurship” and “entrepreneurship” can break down quickly. When we’re talking about African students building new web applications to make it easier to send money to families back home, what should we designate that? Entrepreneurship or Social Entrepreneurship? Or does it not matter? Should it perhaps make us wonder if we should instead be holding up that type of work to argue that real entrepreneurship is about the creation of all types of value – not just about financial wealth. In other words, maybe our view should be about the inseparability of “social” from “entrepreneurship,” and perhaps that’s easier to understand in the emerging market context.

Indeed.

To add a bit of my own perspective… I became aware of the concept of social entrepreneurship back in 2005, while carrying out research in Colombia. Disheartened by the limited amount of management expertise within the NGO community and the lack of clear accountability in how aid dollars were being spent, I found myself strangely gravitating toward for-profit, purpose-driven enterprises.

Really, the change was weird for me.  I had spent most of my college days being suspicious of corporations of any size and disgusted by economics and its profit-maximization principles.  I questioned economic globalization and modern-day capitalism. Yet, as I grew increasingly disillusioned with life inside non-profits (NOTE: I do recognize that there are many outstanding, well-managed non-profits out there!), I began to truly appreciate the incentive systems that exist in the free market and within for-profit organizations.

In fact, an unwieldy and mildly disturbing appreciation for the concept of “profit” itself began to bubble up from deep within me.  I realized that profit, despite its sullied reputation, plays a hugely meaningful role in the life of corporations.

Profit is, for most companies, a measure of the overall health of the organization.  It is the final word on 1) whether you are producing products and services that people value enough to actually pay for and 2) whether the organization is being managed effectively and resources stewarded efficiently. In this sense it truly is the “bottom line.”  And of course profit and, more specifically, free cash flow are also the forces that enable growth.  Conversely, lack of profit resulting from mismanagement and/or creative destruction eventually leads to the dissolution of the corporation and allocation of resources to where they can be put to better use.  Generally speaking, all good things.

But once we recognize that profit is not inherently evil or something to be minimized, the concept of “social entrepreneurship” starts to break down a bit.  What makes an enterprise “social” if not some aversion to profit or, at least, strict prioritization of doing social good over making money?  It can’t simply be the desire to bring about change or have a positive social impact.  By those standards, some corporate behemoths might even be (or once have been) considered social enterprises.

Take Google and Ford as examples.

Sergey Brin and Larry Page were HUGELY suspicious of traditional corporations when they started tinkering with the PageRank Algorithm. Google was born in part out of their disgust with content portals like Yahoo, who gave the best real estate to the highest bidders, and search engines that were centered around paid-for results.  Since day one, they have aspired to make readily available the entire world of information to anyone and everyone who might care enough to look for it.  They dreamed of democratizing knowledge and, indirectly, knowledge-creation, and that’s exactly what they’ve done.  In the process, they’ve made billions of dollars and grown at an incredible rate.

Ford, on the other hand, had a dream to make an automobile that the average working American could afford. Before the Model-T, automobiles were toys for the rich and famous.  In addition to being superior modes of transport, they were conspicuous signs of wealth and privilege.  In a sense, the success of Ford democratized movement.  And his foresight in understanding that employees can be customers also led him to offer unprecedentedly high wages to Ford assembly-line employees.

So are/were Google and Ford social enterprises?  If they once were but are no longer, at what point did they cross over to the dark side?  Where do we draw the line between social entrepreneurship and plain-old entrepreneurship.  Should we even attempt to define that line?

To the last question,  I say “no,” and for two reasons.  First, who’s who will be self-evident the majority of the time. Secondly, and more importantly, trying to carve out a world for social enterprises vs. “other” enterprises will only serve to reinforce what is a false dichotomy and feed our aversion to valuable ideas like “profit.”

Rather than looking for better ways to categorize and attach labels, let us strive to create a world in which enterprises in general serve the needs of society while behaving responsibly.

"Overhead" and Old Corporate Wisdom: What Gets Measured Gets Done

Nancy Lublin from Do Something wrote a great column in this month’s Fast Company on overhead as the bogeyman of the non-profit sector.

She’s right.  There is nothing inherently evil about overhead.  Of course, some types of overhead are wasteful (think: auto execs, private jets, and Obama).  However, other overhead is good and extremely worthwhile. IT spend in a telecommunications company, for example, is not only necessary but can be a source of strategic differentiation if applied appropriately (think: 3G).

My day job is in HR and leadership consulting.  There, we struggle with this issue on a regular basis. While “people are our greatest asset,” they show up in only one place on the financial reports.  That would be under expenses.  So how do we tend to manage people?  That’s right, as liabilities.

The good news is that the earth is moving in HR.  Companies are finding increasingly accurate ways to measure  the productivity and capacity of the workforce as opposed to just payroll expesnse. Let’s hope that we start to see a similar shift in the NGO world.  Because simply viewing overhead as a necessary evil is not only flawed thinking but can severely constrain our organizations in their ability to grow and more effectively serve their constituencies.