Friday, June 22, 2012

A Smarter Way to Help Others, While Making Profits

I may not be a frequent blogger but I do consider myself a voracious reader. This morning while waking up slowly to a new day I read a great post by Erik Simanis on the Harvard Business Review. Erik’s newest article was titled The Smart Way to Make Profits While Serving the Poor. Now I’ll admit the title attracted my attention because of its almost devious tone, but the article gave me some great ideas about my own community development work.

Eric’s argument can be broken down like this. “Low price, low margin, high volume” is the traditional model for serving low-income people. However this model requires that a product obtain a large share of the market in order to be successful (30% or more according to Eric).  While his examples are more focused on consumer products, I feel that this same situation also plays out in the community development field.

I work with lots of nonprofits across a very large state. Many struggle to make ends meet because they are also trying to use the “low price, low margin, high volume” model. Unfortunately, there are very few that reach the last, and according to Eric, most important aspect, high volume.

The nonprofits I know are great at producing good products at very low prices and at very low margins. However, it can take years to grow to the point of capturing 30% or more of a market, and in larger urban areas that goal may never be obtainable.  Many groups do manage to hang on and have minimal impact for many years, but never see the growth or impact that they should by using this model of development.

So what’s Eric’s solution? Well, he points to three other strategies that can work individually or together.

  • Localise and Bundle Base Products
  • Offer an Enabling Service
  • Cultivate Customer Peer Groups

These strategies have also been used by many nonprofit organizations successfully. Here are a few examples from the work that I do.

The most successful rental property portfolio that I’ve financed in the past 5 years is run by an organization call Rainbow Housing Assistance Corporation. While they’ve grown by leveraging housing tax credits and tax exempt financing to build a large multi-state housing portfolio, I think that the key to much of their success is the resident services programs that they run.  One might think this service fall more under the category of an “enabling service”, but Rainbow’s delivery system meets the “localize and bundle” category.

Rainbow develops and packages core training and tenant service programs from their home office. These packages are then customized to meet local needs and to leverage local talents and direct service providers. The benefit of this approach is that Rainbow can produce very consistent reporting and performance across a wide variety of properties and locations.

Other organizations do this successfully too. Habitat for Humanity is a great example of a nonprofit that has grown large, and relatively successful, based on their ability to centralize planning and product development, and then dispersing those based products to affiliates on both a national and global scale.

Enabling services are probably the area in which I see the most crossover in the affordable housing sector. Those groups that are the most successful have developed key services that clients can access, which either lead to obtaining housing, or are the pathway to moving up and out of subsidized rental housing programs. Home builders in the affordable arena that provide homebuyer counseling, down payment assistance and in some cases post home buyer services generally are the most successful. Many organizations even start out in one service and then grow into new arenas in order to become more self sufficient.

One recent example of this is Frameworks Community Development Corporation, a growing homebuyer education provider that we’ve helped to become a housing provider through acquisition and redevelopment of foreclosed and blighted properties. Having just reviewed their most recent financial statements shows me that their success in transitioning from a single service entity, into a multi-service one, has been very beneficial for their bottom line.  And very likely for the benefit of their clients, too.

The last area that Eric writes about, cultivating customer peer groups, is an area that nonprofit also do well at, but this is the key component that I think I can do better at in my own work. Over the past three years we’ve built up a network of local partners who’ve helped us build a statewide land banking program with more than 350 properties, to date. Understandably, I’ve been a bit busy with the individual aspects of this program, but Eric’s article helped me realize that there was one significant weakness to the program.

I’ve failed to cultivate our network and bind them together under a common mission and goal. You might call it the ‘forgetting the forest for the trees’ syndrome, but I realized this morning that if my program is going to become more successful I need to focus on this aspect of the program’s development.  Building the strength of my network might also increase participation by my local partners and lead to more property purchased, redeveloped and sold to low-income families. That’s not only our goal, but our mission.

I’ll try to focus on this over the next several months and record what steps I take to move forward. Any advice from readers would be great.

Best regards,