The paradox of sustainability of developmental organizations through business revenues

The idea has been growing in popularity and has all but snowballed into an immutable law – it is considered unfashionable, pessimistic and cynical to question the idea, and in fact, why should one question it? It is a beautiful win-win, an elegant theoretical solution, and proper management should make it a success which can be scaled. The idea I am talking about, is that developmental organizations, such as NGOs, can morph into revenue earning businesses, and manage their P&L well enough to sustain their operations without grants. They would market and sell products and services produced by the members of the poor communities they strive to help. The benefits for customers are that, more products and services become available for consumption, probably at competitive rates and better quality. The benefits for community members are that jobs are created and incomes improved. Over a period of time, the profits from operations would be enough to sustain the management overhead costs of the business exchange, and responsible ploughing back of profits, and eschewing of the greed that sometimes comes into pure commercial businesses, would ensure that this entire model would grow.

Now, my view is that this model can work within limited frameworks only, and the operating profits earned would never be high enough to cover the entire overhead of managing the operation. In short, you can NOT run a true developmental organization without some grant funding.

My logic for taking the counter view to popular thought is as follows: A developmental organization should go where market forces do not go. There is no great achievement in uplifting a micro-entrepreneur who is already on his way up… there is no great glory in supporting a community or group which is competitive enough to safeguard its interests and speak with a voice which is regularly heard. A true developmental initiative should therefore actually go against the market, and try to provide growth opportunities to those whom the market has already declared as uncompetitive.

Now, suppose with some seed capital, a developmental initiative succeeds in building the skills, resources, capabilities, market reach and overall competitiveness of a community of people whom the market on its own will not sustain; is it not conceivable that over a period of time, this community would actually become competitive and therefore provide enough returns to the developmental organization to now cover its costs?

The simple answer is yes, but if this happens, then, the developmental organization would now need to milk the asset it has created (even if only to a moderate extent, without “greed”), to cover its operating costs going ahead. As this point in time, what do we have? A “developmental organization”, which is actually an early stage investor, taking back returns from a community or group of people, who have now become competitive enough to win in the market, with the capabilities that they have developed. Therefore, while this would be a fair and justifiable outcome for the developmental organization, giving it a well deserved positive return on investment, the fact is, that it has ceased to be a developmental organization, since it does not any more go where the market refuses to go!!!

To remain a true developmental organization, if indeed that is its vision, then this organization, at the first sign of sustainable profitability in a community initiative, should actually exit it! This is because if the community is able to earn sustainable profit, they do not require developmental support any more. Therefore, the true developmental organization works with communities which need support, strives to improve their capabilities, competitiveness, effectiveness and productivity… but even as the community starts approaching the tipping point to achieving these very qualities on a sustainable level, the developmental organization must exit, foregoing all the returns it could have earned, and seeking out some other community which now needs its support. If the developmental organization stays on and remains engaged with the now productive community to get a share of the returns, it is an investor or a venture capitalist, (though a benign one with a social orientation), for the main focus would then be managing the portfolio of investments and returns, rather than doing developmental work. Then in this case, how does the true developmental organization sustain itself, if it walks away from the asset it has created at precisely the point in time when returns start emerging? The answer, clearly, is through grants.

While it is again a fashionable cliché to say that grants will not go on forever, the simple truth is they will. At least, they are as likely to go on as revenues in a market economy, no more and no less. As long as there is a sovereign government, there would be some government spending on welfare. As long as there are corporate organizations eager to bolster their image as responsible entities, there will be CSR (corporate social responsibility) spending. Therefore, my simple view is that a developmental organization can achieve sustainability, but not necessarily through business revenues only. In fact, sustainability would be largely achieved only through grants. This has a deep and all powerful impact on the business plans and projections that developmental organizations and social enterprises would make, since as per this view, their revenue projections only have to cover a portion of their cost, and the rest must be covered by grants. The next question would therefore be, how do we bring long term predictability in grants, but that is a separate problem. This is therefore very different from making unrealistic claims to cover all costs over time from business revenues. If the developmental organization, along with the members of the community it is trying to uplift can actually be completely sustainable, then they are competitive already – therefore, where is the support needed?

NGOs trying to build a sustainable business model would therefore do well to mull over the actual identity they wish to create for themselves in the long term; Similarly, social investors would do well to question where the thresholds lie, between returns they look for on investment and actual developmental impact they want to bring about, where it is needed most.