Profits with social value

Profits with social value
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First Published: Sun, Dec 02 2007. 08 01 PM IST

Updated: Tue, Dec 04 2007. 03 52 PM IST
MO is like any other lifestyle brand that pans a range of products from toys, apparel and furniture, except that it is owned by a non-profit organization, Maya Organic. Maya Organic provides a formal structure to workers in the informal sector by offering them training, material and marketing support so that micro-entrepreneurs can build a network of sustainable enterprises.
Likewise, SKS Microfinance Pvt Ltd, one of the fastest growing microfinance companies in India, focuses on growth through a financially sustainable business model.
Cyrus Poonawalla, chairman of the Serum Institute of India Ltd, too, runs his organization, which manufactures low-cost vaccines and immuno-biologicals, like any other for-profit company, but with a focus on creating social value.
GramIT, a rural business process outsourcing (BPO) venture set up by Byrraju Foundation—founded by B. Ramalinga Raju, chairman and founder of Satyam Computer Services Ltd—trains and engages rural youth to provide services ranging from handling outbound voice processes to processing records of corporates and government agencies.
There are other entrepreneurs who have businesses which develop fuel-efficient, clean energy and cost-effective products, solutions and technology.
As organizations—both small and large—realize the business imperative of inclusive growth in the communities they operate in, a group of people are redefining the ways in which businesses can take charge of problems and creating their own models to do this through innovation.
“Typically, these business owners find out what is not working, and solve the problem by changing or improving the system, innovating and extending the solution to customers and communities, and creating value for all the stakeholders,” says Ram Sarvepalli, partner, Ernst & Young Pvt. Ltd.
In the past 10-18 months, this leading professional services firm has used business sustainability as a key parameter while looking at people who have used differentiated ideas and have innovated to shortlist finalists for the Entrepreneur of the Year award. In fact, Ernst & Young instituted an award to recognize social entrepreneurship in India for the first time this year.
After a master’s degree in international affairs from Yale, SKS Microfinance founder Vikram Akula visited India as a Fulbright scholar to coordinate a project on providing micro finance to marginal farmers. It was during his stint as a loan officer with Deccan Development Society, a non-profit organization in Hyderabad, that Akula realized “micro finance had tremendous potential to battle poverty, but was often implemented in an incredibly inefficient manner”. He says, “It was labour-intensive, non-standardized and small-scale.”
Akula saw the lack of capital, capacity constraints and the high costs of delivering micro loans as the main constraints and set up SKS in 1998 on three principles: Using a profit-oriented model to overcome capital constraints; leveraging best practices for scaling from the business world to overcome capacity constraints; and using technology to automate processes and lower costs. The company provides loans and life insurance cover to customers to protect against losses during the loan period.
ACME Tele Power Ltd’s managing director Manoj Upadhyay hit upon his business idea while trying unsuccessfully to make a call during a holiday in Uttarakhand. The local telecommunications office told Upadhyay that the system had been switched off because of thunderclouds. The damage caused by a lightning strike, he was told, would take two days to repair.
“As a telecommunications professional, I clearly saw that finding a cost-effective solution would make good business sense,” he says. Upadhyay thus set up a company, Adhunik Power System, to manufacture a lightning-surge protection system.
Upadhyay’s business model is simple: It should be helpful to the customer, the society, the innovator and the environment.
So, how are these business owners any different from other entrepreneurs? Not very—except that their objective is not just making profits, but also creating sustainable businesses and solutions that have a larger social impact.
In fact, these entrepreneurs are as businesslike as they come. “This is not charity but business at the end of the day. Bottom line, thus, matters,” says Solomon Jaya Prakash, director of programmes at Maya. “There will always be a place for philanthropy in society; but charity does not empower people the way a social enterprise does,” adds Prakash.
It’s not as if social entrepreneurs seek to generate social value rather than profits, as is commonly assumed. They firmly believe that parity and justice in society can only be achieved through markets.
“If you want to bring scalability and sustainability, you will have to use market principles, but in a manner that fairly benefits the poor and marginalized,” says Prakash.
Maya Organic, which exported almost 80% of its organic and quality-compliant toys to the US, Europe and other countries, clocked sales of Rs3 crore in 2006, and expects sales of Rs8 crore by next year. “Our sales last year are not reflective of our potential, since we were concentrating not so much on selling but (on) back-end work,” says Prakash.
SKS, which has an annual growth rate of 200%, has disbursed Rs1,415 crore to 1.3 million poor women, with a 99.59% repayment rate as of November 2007. The revenue generated by one GramIT BPO centre is equivalent to that from 500 acres of wetland, i.e. around Rs1 crore.
The profit-oriented model is drawing a number of angel investors and has spawned a new group of venture funds such as The Aavishkaar India Micro Venture Capital Fund, Acumen Fund, Unitus (in the micro finance space) and Nadathur Holdings & Investments, focused on social enterprises. “Apart from venture funds, some of the large corporates and leading banks also have programmes which make investments in such enterprises,” says Sarvepalli.
Akula’s SKS business model attracted equity investments from venture capitalists including Vinod Khosla (co-founder of Sun Microsystems, Inc.), Sequoia Capital (an early investor in companies such as Cisco Systems, Inc., Yahoo Inc. and Google Inc.), and Ravi Reddy (co-founder of Think Systems Inc.).
Maya Organic, which will be expanding its outlets in New Delhi and Hyderabad in the next few months, has already managed to pull in $3.5 million (approx. Rs14 crore) and is trying to enrol more investors for the venture. “Along with increasing our store numbers, we are in talks with some big retailers for sharing retail space,” says Prakash.
Motivated by these social enterprises, non-profit organizations, too, are going beyond traditional funding practices. In the next six months, Healing Fields Foundation, a non-profit society which offers a health insurance product, Parivar Suraksha Bima, to the needy, is going to spin off into a for-profit company.
Says Mukti Bosco, secretary general and founder-member, Healing Fields: “Charity can take you only that far. For sustainability, you need to make profits and plough them back to reach out to more people.” Bosco does not want to name her angel investors, but says there’s no dearth of funds for sound business models.
Still, social enterprises face challenges and, experts say, the sector will need to leverage the principles of global businesses to succeed. “Standardization is integral to rapid scaling,” says Akula. He cites how standardized processes have helped corporations such as Coca-Cola Co. and Starbucks Corp. penetrate the Indian and other markets. “On the other hand, NGOs had only scaled outreach to about 10-15% of the poor,” he says.
Also, the lack of technological applications has resulted in higher cost and turnaround time, thereby diminishing the effectiveness of the benefits. “Technology can not only help companies streamline processes and increase productivity, but also reduce costs and pass on the benefits to customers,” says Bosco.
Sustainability as a business concept is not only gaining ground in India but is also being increasingly audited. “The most important participants driving the phenomenon are investors and analysts,” says Sarvepalli. “More and more investors are asking questions about what businesses are doing for their customers, communities and environment.”
As organizations realize the benefits of sustainability in terms of brand evangelism, attracting talent and the far-reaching impact it has on the future of business, social entrepreneurship is gaining currency.
“In the last two years, social entrepreneurship has come up in a big way,” says Sohini Bhattacharya, director, South Asia partnerships, Ashoka: Innovators for the Public, an organization that identifies, supports and funds system-changing solutions.
“Some perceive social entrepreneurship as business with a conscience or just a social enterprise; but the concept goes beyond this,” says Bhattacharya. It’s about “large, systemic change.”
And India, with its unique matrix of huge population, lopsided development, poor governance and inequitable growth among other social issues, provides a context for social entrepreneurs to think differently and bring in innovation to solve social problems.
“We are sitting in a land of opportunity. It depends on whether you view an obstacle as a problem or as an opportunity,” says Upadhyay.
DASARI JAI RAMESH, 61
Chairman, Vijai Electricals Ltd
In 1973, Dasari Jai Ramesh, an engineering graduate, started Vijai Electricals to manufacture transformers, with a bank loan of Rs1.36 lakh and 10 employees. Now, it is India’s largest maker of transformers, with a turnover of Rs1,400 crore in 2006 and customers across 20 countries.
Vijai Electricals has executed electrification projects in more than 7,600 villages across India, including Bihar, Uttar Pradesh, West Bengal and Karnataka. It has been working to produce energy-efficient equipment and is involved in upgrading distribution systems to minimize transmission losses. Vijai Electricals has invested around Rs500 crore, and will be putting in more than Rs 100-150 crore this year to expand its product range. “We plan to join the $1 billion club in the next three years,” says Ramesh.
Ramesh hails from a middle-class family in Andhra Pradesh’s Krishna district. “I know how powerless villagers are because of a lack of resources,” he says. “I realized that what can be produced economically is not only good for my customer, but also for society.” And then began the focus on making economical energy-efficient products. Ramesh sees a tremendous opportunity to increase profits while being useful to society.
CYRUS POONAWALLA, 66
Chairman, Serum Institute of India Ltd
It all began when Cyrus Poonawalla, famous for his stud farms and vintage cars, was looking to start a career of his own. “I had to move away from my family business of horse breeding,” says Poonawalla. He discovered the possibility of creating tetanus anti-toxin serum while talking to a veterinary doctor. “The veterinary consultant to our stud farm told me that the plasma of discarded race horses was being used to produce serums,” says Poonawalla. “So I decided to set up a laboratory to manufacture serum,” he adds.
The Serum Institute of India Ltd was born in 1966, with a capital of Rs5 lakh and limited technical know-how. At that time, there was a shortage of vaccines, and India was importing them at high prices. Since its inception, pricing has been a key element for the Serum Institute. “The focus on low-cost production of vaccinations has been integral to our business model,” says Poonawalla. “I believe you can make money as well as create a social impact.” Poonawalla, a commerce graduate, did his PhD thesis on ‘improved technology in the manufacture of specific anti-toxins and its socio-economic impact on the society’, in 1988. “Even if you sell vaccines for the price of a cup of tea, you would still have made a profit of a few rupees, and if you produce millions of them, you have made a few millions and (have) also made these drugs available to a lot more people,” he says.
The Serum Institute has made vaccines both affordable and abundant. It is estimated that two out of three children immunized in 2004 received one made by Serum Institute. The company, which markets its products in more than 140 countries, grossed revenues of Rs952 crore in 2007 and has been growing at a compounded rate of 22.5% over the past five years.
MANOJ UPADHYAY, 37
Managing director, ACME Tele Power Ltd
When Manoj Upadhyay, an electronics engineer, was working with a German telecom power company, Benning Gmbh, remodifying power systems for the Indian environment, little did he know that several years later, he would be running a company that served a social purpose.
In 1999, Upadhyay had to make a career decision—of moving on to another job or starting something of his own. He set up a company with Rs2 lakh— Adhunik Power System. Upadhyay and his colleague began with consulting and moved on to manufacturing lightning-surge protection systems for telecom sites. By 2003, the company had made sales of Rs30 crore.
“It was time for me to move on to something else, since I felt there was not much scope for growth in lightning-surge protection systems,” says Upadhyay. He started a consultancy focused on innovation. The business model was simple. They began by identifying a problem, and checking if there was any conventional solution to it. If there wasn’t, they would work on a cost-effective solution—something that could pay for itself in 15-24 months. “The most important determinant was whether our solution was of use to the customer, society and environment. If it was not, we would not do it,” says Upadhyay.
Upadhyay set up ACME Tele Power in 2003, focusing on solutions that are cost-efficient and help conserve natural resources. In four years, ACME has grown—from a turnover of a few thousand rupees to Rs900 crore in annual revenues this year. It employs 2,500 people, and has research units in India, the US, Europe and Canada.
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First Published: Sun, Dec 02 2007. 08 01 PM IST
More Topics: Business | Profit | Brand | Social Value | Technology |