Is It Profitable?

In the world of rural economic development one of the most common mistakes is executing a program without accountability to the truest measure of sustainability - participant and program profit. Just about everyone in business in the developing world can provide an important opportunity to their community but only if the opportunity is sustainable. It's all too common in economic development work that what began with good intentions fails because of business fundamentals, rather than philanthropy. Sustainability of development is tied to the program's intrinsic profitability.

A few years back, we had the opportunity to compete with a prominent national for private funding in his home country. Now while it may seem on the surface that we were potentially putting someone out of business, the fact is that the gentleman would have put himself out of business after wasting several hundred thousand dollars. His intention was to get the government of his country to get behind an agricultural processing program. We pointed out that the people from which he sought local support profited by the failure of the industry. How? By skimming relief money from international donors. His response was sadly too common, "I know these people. I'll go to their house and tell them how important this is." Look, people who profit from something are not motivated to change.

His tactic was to bolster donor/funder support for an idea that hadn't been researched properly. What he needed more than anything was to know his product from farm to retail, to know complete production data and what were the most likely causes of failure to his venture. Moreover, he didn't know product's price points or how the product migrated along the value chain. He hadn't done any research on what the market would set as a conservative basis for his forecasting.

I have to say that getting reliable numbers in an undeveloped enterprise effort is challenging beyond words. In our field of cashew production, it was virtually impossible to know how fast training would occur, the split to whole nut ratios for the workforce, the correct and fair wage of each workers place in the production or reasonable expectations for quality of production. At the beginning we faced the same temptation to focus on product marketing rather than production at first. Over the first two years of our venture, we found that all of our marketing research while important didn't mean anything because we couldn't produce white kernel cashews at a competitive price. In fact, no one could; a fact demonstrated in no less than five large scale processing businesses failure and closure. Millions of dollars in investment capital were wasted by amazingly skilled investors because they didn't bring diligence to their decision in the fundamental component of sustainability - profit.

As we assessed the reality of our production problem we came to a shocking conclusion our project couldn't work. You can't imagine the horror I felt as our dream of working in arguably one of the poorest countries in the world came to a crashing thud. So, as all entrepreneurs do, we asked if there were any other ways to make the project profitable. We decided that there was only one possibility, marketing to retail. Not only did this dramatically increase the cost of capital improvements from about $50,000 to $450,000, but it required a much more rigorous focus on business training rather than merely processing skills. The profitability became a self-selling feature of our work.

Virtually every venture in every part of the world has partners or mentors that make the work sustainable. Someone said that sustainability means the beneficiaries of a program must continue it on their own. I couldn't disagree more. I'm not sure if it is an anti-colonial mindset or lack of long-term willingness to commit that has created this utter misread of development work. There is nothing wrong with an organization having an influence in a rural community for decades. In my opinion, there is something wrong when they don't. The real measure of their value is the impact they have on the betterment of the community and the individual households they work with. Long term business partnerships provide stability and presence to a fledgling start-up.

If you're in Africa wanting to create a business then do your research well. Production costs aren't interesting unless you plan to succeed. If you can't employ someone at a fair wage and still compete in your target market then figure out why. Is it their speed, their currency's value, or the quality of their work? You have to ask what can be done to tighten cost without sacrificing your worker's well-being. Some business ventures are stories of miraculous profitability and brilliant ideas, but most businesses are slow, methodical efforts of design and redesign working their way into a solid model for success.

If you're hoping that the UN family of organizations or the World Bank will be your answer to funding then you might as well pack up and go back to the bush. My experience is that the people in those organizations who want to help can't, and the people who can have pet programs and projects they are already committed to fund. In that sector it is all about who you know not the quality of your program. So, don't be discouraged, just work your business plan and you'll find money. After all it isn't government that fights poverty it's business.

“God grant me the courage not to give up what I think is right even though I think it is hopeless.” - Chester W. Nimitz

As you look at your dream do you believe it is God's purpose for you?  Do you believe without a doubt, that this dream is the very best you have to offer?  If you believe those two things, then you just may be willing to pay the price to see your dream into reality. You will stay true to the cause, whether there are resources to proceed or a void from which you find that the only gift at times is you.  

I think everyone engaged in non-profit work dreams that a great angel will come along and make it easier.  The angel will tell someone you are worthy of support.  He will  inspire them by your dedication.  The angel will remove those who frustrate your cause, and will deliver into their place others more helpful.  He will speak to your enemies and say, "Let him pass."  And it might be so, but more often the power of our faithfulness is found in stepping up to the edge of the boat like Peter saying, "Lord if that is you, beckon me to walk on the water with you."  Not every story has a great victory.  Not every worthy dream, finds its fulfillment.  People will mock and laugh to the demise of their efforts while you sit unsupported with an possibility of transformation. 

As I look at my dream to reduce poverty, there is a huge chasm between what is, and what I hope to accomplish.  Will God provide what I think I need?  I simply do not know.  But what I do know is that I cannot quit.  The fight is to cross the line of victory, or to give it all trying. It's really a gift that we have limits to our ability.  In that way, because our discernment is so easily obfuscated, we can give our all to our task and trust the rest to Him.   

The psalmist said, "Unless the Lord builds the house those who build it labor in vain..."   Just because his building schedule is untimely to us, it doesn't mean God is late to the job site. 

Micro Finance - Real Info Wanted

Sitting at a micro credit luncheon in Seattle, I heard an incredibly inspiring story of a woman in central America who built a business from nothing.  It was so moving I gave 100 bucks even though I hadn't come to give anything.  There was no guilt in the message.  There were no crying  babies, or impassioned pleas from movie stars.  The wonder of the micro credit model is that it is so incredibly easy to give to.  Small bits, that change the world - for a novice the bite sized ask met me right where I was at.

There have been a number of really great articles highlighting the challenges of micro credit.  Thomas Dichter authored a critical piece on the effectiveness of micro-credit.  I will say, that Dichter asks some pointed questions and makes some invaluably probing dissections of the concept.  It should also be noted that he suggest that if credit opportunities exist why add to the market new credit opportunities.  That's reasonable, but in many places in the world credit does not exist.  Well, at least in Guinea-Bissau where we are it doesn't. 

We've all heard about how corporations have cooked books to make their shareholders happy with the results.  I was reviewing the 2007 year end report of a very well known micro finance charity - one of the largest.   The most astounding thing to me is that it's November 2008 and they still haven't audited it.  Here's what they didn't say:

1. They did not state how much money was generated in positive revenue from program repayment.
2. Similarly they did not show any positive revenue as retained earnings from loans for program growth.
   
3. I saw their impressive "98% of loans" repayment rates.  With the loss of 2% of all loans - what size of loans are typically lost and how do they compare with the median size of the loans made?  Because if you make 90 $100 dollar loans and lose 2 of 10 $5000 dollar loans haven't you lost a sizable percentage of your capital?  From a business perspective lost if capital should not be attributed in percentages of loans made but in dollars. 
   
4. Cleverly split up into various line items, they showed 20% of their new donations were spent on training, program administration, network maintenance, fundraising, and none of it was investment capital.  I have no problem with that if they aren't slowly consuming their reserves.  If it is sustainable, the admin has to be covered by generated revenue not donations.

I saw lot of twisting and turning of the data that makes for a very impressive albeit undecipherable and non-standard public report.  What wasn't made up for in straight ahead figures was carried by anecdotal stories of success with the opiate of the average $150.00 change the world price tags.

Look, if we want to talk about real sustainability, we need to think from a business perspective.  Few businesses turn a profit in their first few years, but at some point, after 5 to 10 years, a sustainable business should be so on several fronts.  They should have a plan in place for sustainable indigenous leadership.  They should have the ability to pay their staff, expand the program, and show fundamental progress.   

I know of a commodity processing company in West Africa that loses about .45¢ on every pound of product.  No it's not much, and they are putting people to work.  Their business plan is to to make up for the loss with quantity.   Are we doing that with micro loans?  If all donations to micro-finance stopped today, would the vast investment capital grow?  If not, it's not sustainable.

Mike

What is poverty reduction?

This may not be the politically correct answer to what is poverty reduction, but it is the right answer.  Poverty reduction is teaching people who to be self sustaining.  I didn't say it's making them financially capable, or securing their food supply.  It isn't providing them with jobs, or giving them access to capital.  All of those things are symptoms or tools.  Poverty reduction begins and ends in how people think.   

• Do your part, and don't rise too fast.
  
• The priority is respect to the leaders.
  
• The land will provide, and if it doesn't we will suffer together.
  
• It will fail anyway why should I try.
  
• It is better not to try than to try and fail or make a mistake.
  
• If I make a mistake I am letting others down.
• I can't own a business because I don't have money.
• The UN or the World Bank will help us.
• What I need is a job, and money.
• Character has nothing to do with money.
• God blesses some businesses for no apparent reason.

Are any of those mindsets true?  They are not.  In fact, reliance on these beliefs as fundamental basis for poverty reduction will doom any venture before it is started.

Business is about relationships.  Managing these relationships means investment of time, resources, heart, and faith.  Subjecting these vital components to behaviors that sabotage them make it impossible for people in developing places to create wealth.  

When we started our work in Guinea-Bissau the people were wonderful.  They were eager, and wonderful people.  For the most part we learned they had come to rely on African charisma and story telling.  When we came up with our plan to create industry, there were so few people capable to manage such a project that we thought that we should start a school.  How long would it take to help people learn business?  We assumed initially two years.   Now after opening two trade schools and numerous businesses, after providing community business classes beyond count, and employing a system of testing, we've come to believe that it will take more like seven years.  This isn't because people are stupid.  It is because of the deeply ingrained mindsets the violate the creativity that is entrepreneurship.  

Moreover, the mindsets above, aren't in themselves useless.  Because the cultures we work in embrace these views, they become the root for incredibly powerful risk management systems.  

I sat with a professor of economics at George Fox University the other day.  He, a liberian by heritage, had so many fantastic questions.  Most of them focused on the model we use.  He told me over coffee at Peet's Coffee, that what we were doing was something he'd never heard of before. 

"So you are a business?" 

"No, we are a non-profit."

"But you make profit?"

"Yes, but all the profit is set aside in a designated cash account to be used as matching funds for indigenous sponsored clinics, children's homes, community schools, and scholarships to higher education."

"But you keep the money?" 

"No, the money is managed by nationals comprise a board of directors."

"Are they paid?" 

"No, they volunteer."

"Would you be open to doing this in Liberia?"

"Of course."

"What can I do?"

So I told him, "John, you're a professor.  All we do is educate.  The businesses are a lab in which new ideas are put into practice.  They are the arena where people can learn the value of creativity, of problem solving, of how to employ others, and how to be the answer to their own community."  The whole point is that entrepreneurship is a new grid of self-sufficiency for many people in the developing world.  

Mindsets don't only plague those in the developing world.  There are people wanting to make a difference in the world with their wealth whose efforts are as ineffective because of their own brand of mindsets.  The diversity of the models they support are so small, that some of the most innovative and exciting efforts being done today, are almost completely ignored.  We'll look at those mindsets next.

Mike

Why Blog About Poverty?

Yesterday I went into a bookstore and asked the clerk, "Do you have any books on poverty reduction in the developing world?"  It became a great discussion.  "Well, we have some books on Yunus, and some things by Jeffrey Sachs," he replied.   That wasn't what I was looking for.  Then he said, "I've read those, but I'm not sold on their approach..."

The young man mentioned that he is Catholic, and very interested in helping the poor.  He told me 3 times in the course of 15 minutes that it was his faith that pushed his inner compass towards grass roots help for the poor.  I mentioned using an approach that isn't governmental, and it isn't micro credit but rather an industry creation approach.  He shared some frustration that there isn't very much information available because this field is fairly new.  I asked him, "So, do you blog?  Do you go to YouTube.com?  Do most of the people you know do the same?  Of course he said, "Sure!"  Then maybe today this is one of the best venues to open up dialog about alternative approaches to poverty reduction.

Ian, thanks.  You got me off my butt and today I'm going to share ideas that people can comment on about what we're learning as we help the poor.