‘Scalability is just as important for non-profits: Here's why’
David Kirk is a former Rhodes scholar, All Black and Rugby World Cup winning captain and currently the co-founder and managing partner of Bailador, an ASX-listed investment fund. In addition, he is the chair of both the NZ Food Network and KiwiHarvest.
OPINION: Scalability is a bit of a buzzword in the world of information technology investing that I work in. It gets thrown around as if it were the universal panacea. It’s not, but without scalability the opportunity to do good in a not-for-profit is limited.
The aim of any venture, not-for-profit or for-profit is to deliver the most good (good = money in for-profits) for the lowest amount invested. In the finance world, lots of profit for a small investment is called a high return on invested capital and it’s what everyone aims for.
It is exactly analogous to a high interest rate at the bank. I give the bank $1000, that’s my invested capital, the first bank gives me a 2% interest rate and the second one gives me a 3% interest rate. The second bank gives me a higher return on my invested capital. I get $30 at the end of the year compared to $20.
In the not-for-profit world we are focussed on delivering the most good (however we define it, and we have to define it as explained last week) for the lowest investment required to get it. The best returns (the most good or money) are delivered by businesses that, as they get bigger, deliver a greater additional return for every additional dollar invested.
Imagine a line on a graph that goes in a straight line up from the bottom left-hand corner. On this line for every move along the x-axis the corresponding move on the y-axis to stay on the line is proportionally the same. For example, if a move from zero to one on the x-axis produces a move of zero to two on the y-axis to stay on the line, this 2 for 1 ratio will be the same at all points on the line no matter how big the numbers. No scalability.
Now imagine a graph in which the line starts in the same place and bends upwards as it proceeds. Eventually it is going nearly straight up. On this line for every small move on the x-axis there is an increasingly larger move on the y-axis to stay on the line. Technically this is called increasing returns to scale. Around the office its plain old scalability.
Now, why is this important for the business model of not-for-profits? Two reasons: a scalable business model means you can do increasing good with a decreasing rate of increase in investment; and two, a scalable business model is much more likely to excite funders.
There are two relevant types of scalability to think about – economies of scale and economies of scope. A real-life example is the best way to explain what these are. Sam Morgan, who is my exemplar of how to be an impact philanthropist, gave me a great example from a project he got involved with in Africa.
The investment was in a lot of small-scale water pumps to lift water from small, dispersed wells. The pumps are powered by solar panels and a small battery. You can see the project has economies of scale in that once the pump is in and running it can provide clean water for more and more people without any more investment being required. But the project also has economies of scope.
Not only does the fresh, abundant water provide safe drinking water, it also provides water for stock and crops. Clean water and improved nutrition from crops improve neonatal survival rates and growth rates and health in young people. Healthy young people contribute more in general to the community and are more likely to become better educated.
At KiwiHarvest we have good economies of scale. Investment in vans, a warehouse and relatively few people remains fixed for a large increase in food delivered. We also have pretty good economies of scope. Not only does the food we collect provide nutrition it also does not go into landfill avoiding greenhouse gases emissions.
And, insofar as we cause a reduction in production because less food is made because more is rescued, we reduce the waste of water, electricity, packaging and other inputs that go into food production and manufacture.