Social Responsibility: Most Foundations including Canadian are not efficient funders of social development, find out why.

Executive Summary

The problem I highlight here is that most corporates may move the money into foundations and not actually spend them. Studies in the US and Canada have shown that Foundations there have been a very inefficient and expensive way to fund social development or allocate money to social enterprises.  They just don’t spend enough.  I suggest that we discuss an approach that involves CSR money used in buying a portfolio of profitable social enterprises.  Indian corporates agree that one has to begin somewhere, take into account the Indian way of doing things and avoid doing the Obvious – the solutions that will happen spontaneously anyway.   What follows are insights on how to avoid the obvious, learnt from my 7 years running a tech-startup at IIT Bombay, using a for-profit social enterprise business model.  We sold software & content licenses, content subscriptions and retail sales of rural insurance products.

While I am a Product Developer, I do not use that sense of the word “Development” here.  Here, by development, we use it in the way of India’s development, i.e. improvement of social and economic indicators such as health, employment, happiness, per-capita income etc..

Why?

  1. Development is slow – thus if we are in a tearing hurry – we may miss the forest for the trees. On the other hand, if we are not relentless and consistent, our efforts, our resources may not fructify.  We have to balance our efforts by setting the correct expectations.
  2. Development (and rural development) is a young field compared to Healthcare.1
  3. Like healthcare, it’s a very complex area where studies contradict one another, doctors/experts contradict another all the time. The complexity arises from an unknown number of systems that interact with one another.  Some interactions are well understood, some are partially understood while the rest are poorly understood.

What practitioners know and want to know

  1. The contradictions are actually a blessing in disguise, as they give us the opportunity to understand the field better, provided we are looking for the lessons and not defending our projects. Since funding depends on our ability to defend our projects, there is less incentive to look out for lessons.  This is also true in Healthcare.  Mistakes made have taken decades to correct – doctors will give you several examples.  The common statistical error is to mistake that if A and B are well correlated, one of them must be the cause of the other.
  2. I will take an example from my experience. It is an accepted fact today that measurements and metrics are fundamental and a pre-requisite to measure the progress of all kinds of projects. This is what I thought when I first started out in Technology for Development.  I equated more computers in schools as better learning outcomes.  My experiences and other practitioner’s experiences taught me something different.  While project and budget planning remain important, one has to rethink the milestones and metrics.
  3. Development metrics in India come in all types and all kinds – reflecting the diversity of demands of funding agencies and sponsors – arising out of a lack of standards.
  4. New generation of practitioners – both eastern and western – acknowledge the limitation of metrics and milestone-led development. They recommend our best bet is to encourage a blend of qualitative and quantitative
    1. Results (when the time-frame is less than 3 years).
    2. Outcomes (times-frames beyond 3 years but less than a decade).
    3. Impact (when recorded over 10 years via longitudinal studies).
  5. So part of the problem in Development is that we have lots of people and organizations experienced in projects that deliver over 3 or 5 or 7 year time frames.  There is a lack of projects and experienced people who work on projects 10 years long.  This is one part of the puzzle.

The state of funding and its trends

  1. Development has its own ecosystem of people, government and various organizations. This ecosystem however is not as developed as their commercial counterparts.  In my own experience, I found development interventions more expensive than commercial interventions.  This is also true in healthcare.  There are no financial incentives large enough for companies to invest in a malaria vaccine for example.  The risk-reward ratio is not encouraging at all.
  2. Another trend is that western sources of funds are dwindling and development people are having to depend more on local Indian sources of funding. While this may be a good trend with local participation taking up responsibility for local development, this is a problem for older organizations who have invested in relationships with their western funding agencies.
  3. Another trend is an entrepreneurial approach – incentivizing social entrepreneurs to set up businesses to solve socio-economic problems. This is a promising approach, there are several social VCs, and if we assess the scale of their impact all we can say is that the jury is still out.  Some of them have not even been around for 10 years – the minimum time period in Development to come up with an answer with some degree of confidence.
  4. Another promising trend is the mandatory 2% of net profits to be spent on CSR is another blessing in disguise according to me. Corporates have no choice but to do their bit in improving the community around them so that they continue to grow, increase their markets and live in a safe, stable society that is going to be unequal for a long time to come.
  5. The problem with the above is that most corporates may move the money into foundations and not actually spend them. Studies in the US have shown that Foundations in the US have been a very inefficient and expensive way to fund social development or allocate money to social enterprises.  They just don’t spend enough.  You are better off giving it to a charity.  How?  A charity or a social enterprise would take your donation and spend all of it on social benefits minus overheads.  The average American foundation spends only 5.5% of their assets on social benefits2.  The rest is invested for financial returns to ensure the assets keep growing, supposedly to benefit citizens of tomorrow.  Even if you consider the scenario over 100 years, a $100 given to a Foundation spending $5.5 every year for 100 years will yield (assuming 10% Discounted Value) a cumulative contribution of $55.  Compare this to the $100 contributed directly to the provider of social services in the first year itself.

If we do another comparison taking into account the foregone tax revenue.  The catch is that the whole donation gets the break, not just the part that is spent.  This in the US is say $40 foregone on every $100.  A social enterprise that spends $100 directly on social benefits is a 250% benefit over the $40 tax foregone.  A foundation that spends $5.5 is a 14% benefit of the foregone tax revenue.

Social Innovation

  1. It may appear from the points made in 7-9 that money alone will solve the problems in Development. Money (and technology) are necessary but not sufficient.  Unfortunately money alone has not solved the problem. A lot of money has been poured into the non-profit sector and we have not realized proportionate benefits.  So where is the problem?
  2. The answer to this depends on who is asking the question and their experience. Since I’ve spent most of my last 15 years in the startup ecosystem, I’ve borrowed ideas from there in my vision of evolving the ecosystem for social enterprises.
  3. I think acquiring successful (which means they have customers who pay for all their costs plus they yield a profit that is reinvested) social enterprises in return for money is a good use of money.
  4. Let me go a few steps back to explain this idea with examples from the commercial world where beneficial disruptions to the status quo are not very uncommon. Take Google, considered one of the most innovative companies on the Internet.  The internet is of course one of the most innovative pursuits of mankind.   Google is at least representative of one of our most innovative companies.  If one analyses their revenues, you quickly notice that most of their money comes from one thing – search advertising.  All other goodies – Google Docs, Youtube, Picasa, Android, Maps… all came from outside Google.  They were acquired.
  5. Another thing you will notice about all these innovative companies – Google, Apple, Microsoft, Amazon, eBay etc. is that they hoard piles of an unusual amount of cash. They do this to buy Successful Innovation – innovation that has gained escape velocity.  They obviously believe that there is no better use for that cash.
  6. So my question is if you substitute Foundations for the cash-rich companies and successful social enterprises for the acquisition targets, what do you get?  You get cash-rich Foundations and Social VC funds acquiring Social enterprises.  The assumption here is that Foundations and other members of the Non-profit ecosystem need Successful Innovations – that the status quo will not do.  The model is to buy the successful innovation, along with the experienced team, retain the same team structure (hence team chemistry) and give them ambitious targets to increase market share (or “Beneficiary share”, “People served”, “Carbon Credits Gained” as the case may be in a social enterprise).  Canadian philanthropy with its long and committed history can take note from these developments.  {Disclaimer:  I have been a past beneficiary of IDRC’s funding when working at IIT Bombay, so I am somewhat biased towards Canadian philantrophy! Most of the money our projects received were however Indian money borrowed via the World Bank.}

References

  1. Tim Harford, Author and Economist
  2. Michael Porter, Professor and Author
  3. Conversations with colleagues within and outside SINE, IIT Bombay

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