Social change work is hard and frustrating and wonderful and terrible; it is also, at times, funny, quirky and just plain fascinating. With this blog we hope to capture all that goes into what we do at Capital Good Fund, and we invite you to join the conversation!

Saturday, February 2, 2013

McDonalds, Apple and Capital Good Fund

I recently wrote in the Stanford Social Innovation Review (SSIR) about the importance of considering competitive advantage in the non-profit space.  My argument there was that, unlike conventional wisdom, non-profits do compete: for funding, for clients, for partnerships and for the tone of public discourse.   That line of thinking has been transformational for Capital Good Fund (CGF), both in terms of the products and services we offer, as well as how we offer them.  For instance, we now market our one-on-one Financial Coaching service as a benefit that employers can offer to employees and schools can provide to parents; in so doing, we are able to secure fee-for-service contracts that are significant sources of revenue for the organization.

Yet for all the good stuff going on at CGF, as well as in the social sector as a whole, we still have a fundamental problem: 1 out of 3 Americans is either in poverty or perilously close to it (there are numerous other social and environmental challenges, of course).  This is despite the fact that there are over 1.5 million nonprofits in the US (including charities, foundations, chambers of commerce, etc.).  Unfortunately, there does not seem to be a relation between the growth in the number of charitable organizations and a decrease in the social/environmental problems they seek to alleviate.

There are a lot of problems with the ways in which the non profit sector operates (inefficiency, lack of scale, lack of funding for innovation, etc.), but that’s not the point of this post.  What I want to focus on is what Capital Good Fund, and organizations like us, can learn from two giant American corporations: McDonalds and Apple.  Why them?  In the case of McDonalds, if you go into any neighborhood in the United States, you are likely to find one of their chains; in fact, they have more than 12,800 restaurants in the United States, serving many tens of million of people.  That’s astounding reach, and begs the question: What if McDonalds created social value, as opposed to feeding unhealthy, cheap food to predominately lower-income Americans?  We’ll explore that in a moment.

Apple is the most profitable company in the world. A crucial element of their astonishing success is the extent to which they control all aspects of their business: they are the only technology company that designs BOTH its hardware and software while at the same time relying on its own network of retail stores to sell most of their products.  This level of control allows Apple to create a seamless user experience, standardize the marketing/presentation of its products, ensure quality, lower production costs, and so on.

Okay, great--so what does this have to do with a CGF, a non-profit financial services organization?  McDonalds and Apple are examples of  successfully using the concepts of vertical integration (Apple) and market penetration (McDonalds), and I believe that without these two approaches CGF cannot achieve its mission. Going back to the start of this essay, an inevitable conclusion is that if an increase in the number of non-profits doesn’t lead to a concomitant decrease in the social problems they tackle, the majority of those organizations are likely ineffective.  This absence of efficacy is a significant problem: for most of CGF’s existence, I assumed that we could ‘layer’ our products and services on top of those offered by others--that is, refer our clients out for various needs, be they job training, applying for public benefits, getting their taxes done, improving their health, etc.

Well, why would I rely on other organizations to meet the needs of my clients if, chances are, most of these partners are sub-par in terms of performance?  The answer is, I can’t, not if I’m interested in maximizing social outcomes and providing the highest level of customer service to my clients.  So what do I do?  Here’s where Apple’s model comes in: I can begin to meet more and more of my client’s needs in-house.  For instance, we now do free tax preparation, in addition to one-on-one Financial Coaching (FC) and small loans, and we will soon be adding a health component to FC.  But there are so many more opportunities!  During FC, we can help clients apply for public benefits, build a resume and search for jobs.  We can secure contracts with the state of Rhode Island to help Rhode Islanders navigate the new health exchanges that will be set up as part of ‘Obamacare.’  We can create an Alcoholics Anonymous-style group support network for clients, so that those we serve can self-organize and support one another as they move out of poverty.  Beyond that, we already built our own FC Curriculum; we use our own underwriting algorithms for loan evaluation; and we handle all aspects of the loan process in-house--from underwriting, to disbursing loans, to reporting payments to the credit bureaus and collecting on late payments.

The vertical integration approach means that CGF can grow in a way that is aligned with our mission and that ensures we offer industry-leading products and services to our customers.  In effect, we are seeking to become the Grameen Bank of America--Grameen has affiliates that offer all manner of services to their borrowers, ranging from cell phone service, to education, to clean water to nutritional yogurt and everything in-between.  I believe it’s this holistic approach that allows Grameen to bring 65% of their clients out of poverty after 5 years with them.

 The other reason why Grameen has had such a transformational impact, not only in Bangladesh but for the over 250 million people around the world that have benefited from microfinance, is scale.  They have 8 million borrowers in every village in Bangladesh and 30,000 employees.  That, when combined with their vertical integration, is the secret to their exponential impact...Which brings us to our second model company, McDonalds.  Simply put, If CGF can create a model that allows for rapid expansion through branches that are relatively easy to set up; if CGF can have a presence in every low-income neighborhood in the country; if CGF can serve tens of millions of people...then we can transform American society.  I don’t believe that McDonalds’ franchise model is the way for CGF to grow (we’ll probably use a branch model), but the point is the same: having a ubiquitous presence in the lives of those we seek to serve would allow us to meet our mission, plain and simple. Consider another example: if you go into any lower-income community in America today, you’ll find a host of predatory financial service companies--payday lenders, check cashers, pawn shops, rent-to-own stores, etc., which taken together earn $100 billion in annual revenue.  Imagine if, instead of these usurious, predatory firms, CGF were to replace them and provide equitable financial products that create pathways out of poverty to their customers!

To sum up, if we are going to finally put poverty in museums (in accordance with Dr. Muhammad Yunus’ dream), we are going to have to approach the problem in a different way.  Clearly, a piecemeal approach--one that relies on a network of inefficient non-profits with infinitesimal reach--isn’t working.  It’s time for us to take up the mantle and demonstrate a new way of fostering social change.  By learning from and embodying certain aspects of the for-profit sector, and connecting them with elements of the non-profit sector (what I call ‘what happens when silicon valley meets a soup kitchen’), perhaps we can finally eradicate poverty in the wealthiest nation in the world.

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