Difficult but doable partnerships

Inclusive Economy26 May 2014Al Hammond

Successful real business partnerships between for-profit or non-profit social enterprises and large companies are rare. There is a lack of understanding and respect between large companies and social entrepreneurs. Rigid internal profit goals or lack of direct personal experience with BOP markets and their constraints are key to big companies’ ignorance, writes Ashoka’s Al Hammond.

Despite early enthusiasm for bottom of the pyramid (BOP) markets among many multinational companies in the past decade, there have been relatively few successful corporate ventures outside of telecom and consumer goods and arguably in microfinance—although the corporate role in microfinance came only some 20 years after the sector was pioneered by social entrepreneurs. In food and nutrition, housing, energy, health, water and transportation (collectively the core of the BOP consumer market in terms of expenditures), large companies have been largely or completely absent.

That does not mean there has been no progress. Social entrepreneurs have been active in all of these sectors, experimenting with hundreds of new business models that generate innovative products or services, some of them clearly with the potential to be commercially successful. Ashoka and Santa Clara University have observed that, if anything, the rate of innovation in novel business models, new uses of technology, and other smart ways to reach low-income consumers has escalated in recent years as the number and quality of social entrepreneurs from every developing region has risen significantly. We see that directly at Ashoka, in the candidates for Ashoka Fellows, and in the pattern of the social enterprises accepted into the Global Social Benefit Incubator at Santa Clara University. But the reality is, most of these social enterprises have stayed small—few have scaled to the point of making a significant market or social impact relative to the scale of the opportunity.

One obvious question is, why can large corporations – which are extremely good at replicating successful models and scaling them across many countries – not join forces with or capitalize on the source of innovation represented by the expanding social enterprise movement? Why do companies not simply buy one or more social enterprises in their field of interest, aggregate the lessons and replicate the models? Even better, why do companies not partner with social enterprises in ways that combine the technical skill, management depth and financial muscle of large companies with the bottom-up market knowledge, community trust and innovative approaches of social entrepreneurs so as to combine their strengths? Ashoka believes this latter approach – which it calls a hybrid value chain – can unlock enormous market opportunities. But it is fair to say that successful examples – real business partnerships between for-profit or non-profit social enterprises and large companies – have been fairly rare, even when the corporate partner had enlightened leadership and a willingness to postpone significant returns.

I believe there are several reasons for this. Sometimes, social enterprises are simply not ready to partner, because they lack the management depth, the auditable financial statements and know how to negotiate with large companies. Sometimes the corporate sector appears blind to the potential market opportunities (e.g. a BOP housing and mortgage market worth hundreds of millions of dollars a year in India alone; over a billion people who lack access to safe drinking water; a market for solar lanterns that already amounts to millions of units annually and is expanding rapidly). But I believe the answer largely lies in a lack of understanding and, sometimes, of respect between large companies and social entrepreneurs. I have personally been involved in several negotiations between a large corporation and a social enterprise, and have seen this first hand – call it corporate arrogance or rigid internal profit goals, or lack of direct personal experience with BOP markets and their constraints. Nor is it uncommon to see, as many social entrepreneurs report, that the corporate ‘partner’ appears to want to take the idea and run with it on their own – without compensating the entrepreneur and often without fully understanding the innovation. For instance, companies sometime insist on a return on investments of around 20%, which is completely unrealistic for a new BOP venture. To be fair, social entrepreneurs also often fail to understand the market pressures that public corporations and their management face, or fully subscribe to the need for a reasonable return of investment.

Does this mean that such partnerships cannot work? I don’t think so, and I believe the social and financial returns of mainstreaming a social enterprise innovation can be very substantial. The combination of the bottom-up market knowledge of the social enterprise and the technical, distribution and financial strength of the corporation can really unlock new markets. But it is clear that such partnerships have to have a basis in trust, secured by a legal contract that defines roles, milestones and obligations – such as a binding commitment not to develop the business without the participation of the social enterprise. There must also be recognition of the different motivations and pressures each partner brings to the table, including that a social enterprise usually does not have a legal staff, a large accounting staff, or other capabilities that corporations take for granted. Moreover, there must be a commitment to overcome such obstacles.