In this session, we're going to think quite carefully about success. In other words, what does success mean for us in this particular enterprise, and what does it mean for the enterprise and the people that work in it? One of the tools we have for operating in highly uncertain environments, where we don't know what's going to happen and we know that we're going to learn a lot of things that we didn't know beforehand, is we think about framing and scoping success before we even start. If you think about a social enterprise in an undeveloped market or in a market that you don't know a whole lot about, you can guarantee yourself that there are many things that you don't understand, you don't know, and as a consequence, there's high uncertainty. It's very hard to predict what success looks like or what your costs will be or what will work and what won't work when there are conditions of high uncertainty. Therefore, if we know that we don't know what is going to happen in a particular environment, what we need to do is to plan to learn and then adapt, as the reality of operating on the ground in that environment unfolds. In other words, we have a hypothesis; we do a test; we learn from that test; we adapt and we continue. What we can do when there's high uncertainty – even though we don't know what the exact market conditions or the ground conditions are – what we can do is we can specify what the minimum success requirements are in order for us to be comfortable, that the effort was worthwhile. And we start here by thinking of success on two dimensions, and these were mentioned early on in the course. First is social impact. What is the minimum social impact this venture must achieve once it's up and running for us to justify continuing with it or its continued existence? Secondly, what is the minimum financial requirement of this entity such that we're comfortable that it can continue as a self-sustaining enterprise on the ground? Or, if you think about this from a nonprofit perspective, how much funding do we need to be sure that this thing can get – this entity, this activity – such that it is able to continue for as long as we have in mind? One of the examples in the book is the Zambia feeds example, the other is The Khaya Cookie Company. I'm going to talk about that one a little bit more in the session. So we decide how many of each, social impact and financial returns or impact, must be delivered in years two, three or four. We can pick whatever is appropriate such that this is something we want to continue doing. And now, we can calculate backwards, based on those minimum success requirements, the size this thing needs to be. In other words, the scope. How big must it be? How much revenue must it generate? What are the allowable costs? What are the allowable assets to be brought onto the balance sheet of the organization? And whilst you don't yet know your actual revenues and costs, you can specify what you need to have in place or the maximum that you can spend, for example, to get to your success metrics. And again, I'll refer you back to the book. This is laid out very carefully in the book for you. Once you framed your acquired performance, now you can scope the size of the venture and decide how big the operations need to be, how many beneficiaries need to be in place when operating at a steady state in order for you to meet your numbers. What's really important to recognize as you set these minimum numbers – and often people find this really, really difficult – they have to choose success, and we're not used to that. But that's okay in these environments because it's one of the unique opportunities you ever get to specify success is in an environment where it hasn't been done before. It's important to choose metrics that are not impossible. In other words, they're attainable, but they must incentivize you and your team to continue to work on them. The social impact frame and revenue are also important for your stakeholders. As you think about getting multiple stakeholders together to back, to support, to guide you in the deployment of this enterprise, you want them engaged, and they need to agree with you that what you're proposing is substantive enough to warrant their engagement and their continued support. Another reason this is really important is with negotiations and future changes of direction or future changes of preference of different stakeholders. If you can get your stakeholders to agree to these metrics very early on, you have something to bring them back to in the event of disagreement or discord later on in the program. You can always say to them, "Look, I hear what you're saying today, but we all agreed when we initiated this enterprise that these were the primary directions, the primary measurement metrics that would determine our success or failure." And it's a way of getting them back to the reasons the enterprise was started, and in that way, ensure the continued alignment and cohesion of the stakeholder group. So let's look at the Khaya Cookie Company as a specific example. In many of the shantytowns of South Africa, up to 70% of women are not only unemployed but have never been employed. And many of them have dependents, three, four, five dependents. If you really think about it, as the entrepreneur did in this case, the problem's not just unemployment. For somebody who's never worked before and perhaps was unable to complete high school, the problem is employability. It's even if there's work out there, they don't know how to do it. They don't have the qualifications; they don't have the experience. So what this entrepreneur or the social entrepreneur decided to do was to tackle the employability problem, and then the employment problem hopefully would be resolved. So unemployment, if you think about it, is capable people who do not have a job. Unemployability is people who have few skill sets, little or no education, and no work experience. Two very different problems. Unemployable people are trapped in the situation as a consequence of circumstances, and Alicia set out to tackle this problem by creating an environment, a cookie production environment, where she would actually train women in the skills of operating a business, of baking, of hygiene, etc. etc. And she did this in the Khayelitsha area outside of Cape Town in South Africa. She sat down and thought, "How do I know I'm successful in this?". In other words, "How many women must I be comfortable that this entity is making employable in order for me to continue working with this enterprise and the women that I'm working with in the township?" So she said her unit of social impact is one trained and employable woman in this particular environment. And when confronted with the question, "How much do I need to achieve in order for this to be successful of my continued investment?" She said the number of 300 trained and employed women in three years. So that's a starting social impact metric. She estimated that one fully-employed woman could produce at least 800 handmade and hand-packed boxes of cookies per year in the baking environment that she was going to set up. Now what she can do is calculate the number of cookie box sales required per year and even per month to justify the training and employment of 300 women. In other words, how much does she need to sell in order for there to be sufficient work for 300 women so that she meets a social impact goal? So if you have a look at the slide in front of you now – this is drawn from the book. It's the framing of the social impact and the social impact goals, if you will, which precedes the financial considerations. The social impact unit is one trained and employed formerly-unemployed woman. A venture social impact goal decided by the entrepreneur is 300 women. The single employee production capacity she estimated at 800 handmade and hand-packed boxes of cookies. Therefore, she would need to sell 240,000 boxes of cookies per year in order to fully employ 300 women which was her social impact goal. And if you think about that, that's 20,000 boxes of cookies manufactured, packed, and sold on a monthly basis. So what Alicia now has, is given her goal, a success goal, of 300 women and her estimation of the production capacity of each human, she knows she needs to sell 240,000 boxes a year to meet her social impact goal. Now remember, if she sells many more than that, she's thrilled. So she's not interested in making sure it's 300. What she wants to ensure is that it's at least 300 because that's the minimum threshold of success for her, and it may be different for you, but for her at least 300 women. Now let's look at the financial goals. In other words, how must this venture look financially, in order for her to be comfortable that she can meet her social impact goals? So she, of course, has to think about this from her own perspective as well as the perspectives of her stakeholders and her employees, her beneficiaries. She was employed prior to starting this venture, so she knows what she could earn in the market earning a salary. She knows what it cost to live in this region – she's going to move there. She needs to be comfortable that she's earning enough to live on and to do what she needs to do. And if she takes on other stakeholders or investors, she needs to be comfortable that they will get sufficient return for their funding, their capital. And of course, this must be sustainable such that she can continue with it, if it works. So she set a minimum financial goal, in this environment, at $60,000 profit after all expenses per year. And she figured that would be the minimum required to keep her living okay or comfortably in that environment and to keep her engaged with the venture. So now what she has is she has set a social impact goals, she set a minimum threshold, now let's look at the framing of the social impact. Her unit of revenue, in other words what she gets paid for is a box of cookies, if she wants to make a profit of $60,000 period, in other words at least $60,000 a year, and she wants to do it at a profitability ratio of 15 percent, in other words she wants to make a 15 percent margin, then she must sell $400,000 worth of cookies per annum. The estimated selling price per box of cookies she figured out would be about two dollars. Now she doesn't know if it's 2.20 or 1.80. Her early estimates, based on the market analysis and the competitive analysis she's done, is about two dollars. So if you think about it, if she must sell $400,000 worth to make her $60,000 at the 15% profitability, she needs to sell 200,000 boxes of cookies per year. So $400,000 at two dollars per box, she needs to sell 200,000 boxes of cookies per year. If we think of the year as a 12-month production year, that means she needs to be selling approximately 16,700 boxes of cookies per month. Now if you compare her social impact goals of 20,000 per month with her financial impact goals of about 16,700 per month, you'll notice that those are not too far off. In other words, she's comfortable that there's relatively close alignment between both sets of objectives. Remember in the social enterprise, profits are subject to social impact, so we insist on that. She's now comfortable that she has set minimums that would keep her involved but of course are targets that she needs to strive for. So as you think about your own enterprise or an enterprise that you are looking at or working with, as you look at the social impact goals, are they enough to keep you involved, are they enough to keep your key stakeholders involved? Now what we can do – and this is an early test of the plausibility of this enterprise – is ask ourselves, given the required volumes of call it 20,000 boxes per month or 240,000 per year, what does that mean with respect to the broader market? And here's an early acid test. If your 240,000 boxes per year represent 400% of the total market, you know that your idea is probably implausible. It's highly unlikely you can increase the size of the market, where it exists, by four times in a few years, two or three years. However, if that represents a very small percentage of the total market, you can be a little more comfortable that it's plausible. In other words, it's not impossible. So in Alicia's case, looking at the broader South African market, that represented a goal that she thought was not impossible, was attainable, and in particular, if she could export those boxes overseas into much bigger cookie markets, then that number would be a much smaller percentage of the total size. So she decided, based on these numbers, that she would go ahead with her venture. So if you think about framing and scoping, what we've done in effect is specified success even though we can't predict with accuracy what our success might look like because of the uncertainty of the environments. We've taken the opportunity to use that specification as a way of getting our stakeholders, our beneficiaries on board and to understand what we're trying to do and how we're going to measure success. By doing it early on, we can now consider how big this venture needs to be by what period of time. And then we can look at those numbers and say: Is this possible? Are we confident, are we comfortable that these goals are achievable? If not, maybe we need to rethink them. If they are, now we know what we need to strive for and over what timeframe. And this is something we use later on in the book and later on in venture planning to begin to calculate all of the costs from the earlier session, the cost table, back into our financial models. And we start with success here and then use all of those estimates to put together a set of provisional financials, that's a reverse income statement, if you will. So we can calculate, based on success, what is going to need to be put in place – equipment, staffing, materials, etc. – and then look at that and say, "Are we comfortable?, "Are we not?" If not, what can we change, and if we can't change anything and meet our metrics, maybe we need to rethink this project or the way in which we envision delivering the project on the ground. With that, our framing and scoping session is concluded. Good luck in doing your own. And we look forward to hearing from you and seeing your commentary in the forums. Take care.
