Saturday, November 27, 2010

Creating Social Value

We just sponsored Sociopreneurship 2010, an event that brought together social investors, industry experts and the media for panel discussions and also recognised and showcased social innovations and entrepreneurs. This event is timely in a country like India and is a mark of the shift in thinking away from non-profit models to market based solutions that can operate at large scale and therefore create social value more systemically.

When we begin to talk specifically about ‘social’ entrepreneurship though, it really begs the question: What does it mean to create social value? I think we all have a notion of what it means but when you try to define it and measure it, it gets quite murky and difficult. One fundamental implicit assumption of social value is social equity or equality of opportunity and access. In this sense we commonly think of social enterprise as an organization that addresses a low income market with a product that can raise standard of living, either by providing greater opportunity or convenience. However, as I have discovered in the past five years, simply product and market are not sufficient.

Microfinance, for instance, provides a very interesting example. The product – basically money – has tremendous potential. Great things have been done with money. You need it for virtually everything. Poor people, by definition, have less of it and therefore want it. It seems simple enough. However, like many products, it can only deliver on its potential if the person who buys the product knows how to use it and is able to use it productively. Conversely, finance has always been most impactful when it is efficiently allocated to sites of the greatest innovation or efficiency. Microfinance distributes money to the least innovative and efficient of enterprise – another cow, another sewing machine, another small shop.

So the product could have social value but it depends who you sell it to, how you sell it and how much you sell to each person. And it’s hard to figure out who is more capable of making productive use of capital, particularly in any cost effective manner. So we currently lend simply based on self-reported intent, sometimes not even that. The social value of microfinance is also highly contextual and it’s not always easy to know where the context is right. For instance a village may not have sufficient relationships with larger marketplaces to know how to leverage it, even if they could physically access it so even good ideas may never pan out.

How much you sell also matters a lot. More is not always better. Just like a drug that treats any disease, there is a dose response curve. Up to a point you have increasing benefits and then the side effects take over as the drug exerts toxic effects.

If you think about money at a systemic level, you realize that the impact depends not just on what the person you lend to creates, but where the money goes. For example, when a local moneylender lends the money, even if he charges greater interest, he actually spends his profits in the same community and therefore supports that local economy. When a corporate microfinance company lends, it takes back the money and it may go out as dividends to international investors. The problem is not simple.

So over the past several years I have come to think of social enterprise not simply as creating more equitable access to a good or service, but really an effort in solving large scale systems problems. Thus if we declare ourselves a social enterprise then I believe that we take upon ourselves a greater challenge – a challenge to solve a problem, but often one we don’t fully understand. This means we have to constantly seek deeper understanding of the problem. So to me, social enterprises, on some level should be R&D organizations. Like a drug company that puts out treatments for disease, your first product may purely treat symptoms and roll in the money, but your labs are still looking for the cure.

As for-profit enterprise, we also create, or fail to create, social impact not simply by virtue of the products we offer and the markets in which we operate but also by virtue of numerous micro decisions that are made at every level in the organization. For instance, coming back to the microfinance example, it matters how each field staff interacts with customers and value can dissipate if the interaction is not right. Thus if we declare ourselves a social enterprise then it becomes extraordinarily important to function in a values driven way, where every person acts according to implicit guidelines that are supported by the incentive systems of the company. In this context, it is also important to find ways to meld business metrics with social impact measures. If these are very separate it is easy to lose your way. This is one of the issues we discuss at length at Madura – what kind of business metrics we can track that will capture social impact and not just business profit. As our understanding evolves so do these measures.

So, in my view, if we want to be genuine to the promise of social entrepreneurship, then we need to take upon us the onus of constantly understanding and debating the problem that we are trying to solve, build our enterprises to be thinking, values driven entities and strive to find ways that meld our social and business agendas so that they are synergistic and not at loggerheads with one another. It is a lot harder than simply building a scalable business.

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